
Class H Y b ^^ J 

1^ 



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r REPORT 



OF THE 



JOINT COMMITTEE 



OF THE 



SENATE AND ASSEMBLY 

OF THE STATE OF NEW YORK 

APPOINTED TO INVESTIGATE CORRUPT PRACTICES 

IN CONNECTION WITH LEGISLATION, AND 

THE AFFAIRS OF INSURANCE COMPANIES, 

OTHER THAN THOSE DOING LIFE 

INSURANCE BUSINESS 



TRANSMITTED TO THE LEGISLATURE FEBRUARY 1, 1911 



ALBANY 

J. B. LYON COMPANY, STATE PRINTERS 

1911 



APR IS 1911 

8. • :, 1% 



SiATE OF New York. 



No. 30. 



,0||l 

IN ASSEMBLY, 

Fehruury 1, 1911, 



REPORT OF THE JOINT COMMITTEE OF THE SENATE AND 
ASSEMBLY OF THE STATE OF NEW YORK, APPOINTED 
TO INVESTIGATE CORRUPT PRACTICES IN CONNECTION 
WITH LEGISLATION, AND THE AFFAIRS OF INSURANCE 
COMPANIES, OTHER THAN THOSE DOING LIFE INSUR- 
ANCE BUSINESS. 



To the Senate and Assembly: 

The Joint Committee of the Senate and Assembly, appointed 
pursuant to a concurrent resolution adopted the 24:th day of May, 
1910, submit the following report: 

The resolution directed the Committee 

'^ To investigate as speedily as possible, all corruption and 
corrupt practices shown to exist by the evidence of the recent 
investigation had before the Senate of the state of ]^ew 
York; all matters indicating corrupt practices in connection 
with legislation which have developed in the recent investi- 
gation conducted by the Superintendent of Insurance ; the 
business methods, operation, management, supervision and 
control of all insurance companies other than those doing life 
insurance business, including fire insurance exchanges and 
state local boards of fire underwriters and the relations of 
such companies, exchanges and boards with legislation, in- 
cluding industrial life insurance; any specific charge, veri- 



4: [Assembly 

fied upon knowledge of corrupt practices or official miscon- 
duct in connection with legislation or the legislature^ or with 
any matter or proceeding before any state department, board, 
body or officer- and any other matters pertaining to the con- 
duct of the business of. the state and its officers which, in the 
judgment of the committee, warrants investigation, to the 
end that such remedial legislation may be enacted or changed 
or method in the conduct of public business may be adopted 
as will prevent a recurrence of any abuse or evils disclosed." 

The Committee organized on the 8th day of July, 1910, and 
selected Hon. Edwin A. Mereitt, Jr., Chairman ; Hon. Alex- 
ander Brough, Yice-Chairman ; Walter E. Moses, Secretary ; 
Charles R. Hotaling, Sergeant-at-Arms ; George M. Shot- 
well, Official Stenographer; and employed M. Linn Bruce, 
as Counsel-in-Chief, and subsequently Alfred Hurrell and 
IsiDOR J. Kresel were retained as Assistant Counsel; Prof. 
Albert W. Whitney, as Actuary, and L. H. Conant and 
Marvyn Sc udder, as Accountants. 

It began its hearings on September 27, 1910, and closed them 
on January 6, 1911, holding during this period public sessions 
on forty-two days, at which testimony was taken. These sessions 
were all held at the City Hall in the city of ]S[ew York, except the 
session of October 21, 1910', which was held at the State prison, 
at Ossining, for the purpose of examining a witness confined in 
that institution. One hundred and eighty-four witnesses were 
called before the 'Committee and examined and 5,500 pages of 
oral evidence and 1,500 pages of documentary evidence received. 

The Committee endeavored to take up the subjects which it 
was directed to investigate, in the order in which they were set 
forth in the resolution, but found it impossible to adhere at all 
times strictly to this order on account of the absence of witnesses. 

Although its work was arduous and continuous, it was found 
impossible to take up all the subjects mentioned in the resolution. 

In considering the subject of insurance, the Committee was • 
compelled, for lack of time, to confine its investigation to fire in- 
surance, including fire insurance exchanges and boards of under- 
writers. Moreover, in relation to the subject of industrial insur- 



IsTo. 30.] 5 

ance the Committee was advised that the Superintendent of In- 
surance had the subject under investigation and would report 
thereon. 

Xo definite and substantial charge, verified upon knowledge of 
corrupt practices or official misconduct in connection with legisla- 
tion or the Legislature or with any matter or proceeding before 
any state department, board, body or ofiicer was filed with the 
Committee. 

A digest or detail of the testimony taken cannot be included 
within the limits of this report. The Committee, however, here 
endeavors to set forth the salient facts established by the evidence 
in connection with the different subjects of inquiry, to wit : 

1. Matters indicating corrupt practices in connection with leg- 
islation developed in an investigation conducted by the Superin- 
tendent of Insurance during the spring of 1910. 

2. Corruption and corrupt practices shown to exist by the evi- 
dence in the investigation had by the Senate during the regular 
session of 1910. 

3. Allegations of corrupt practices in connection with legisla- 
tion relating to payment by the state of a beet sugar bounty. 

4. Allegations of corrupt practices in connection with the anti- 
race track gambling bills during the regular and special sessions 
of the Legislature of 1908. 

5. Allegations of corrupt practices in connection with amend- 
ments to the Agricultural Law, with reference to milk, during 
the session of 1909. 

6. The business methods, operation, management, supervision 
and control of fire insurance companies, exchanges and state and 
local boards of fire underwriters. 



Matters Indicating Corrupt Practices in Connection 
WITH Legislation Developed in the Investigation Con- 
ducted BY THE Superintendent of Insurance, During the 
Spring of 1910. 

Between March 18 and April 6, 1910, a public investigation 
of the expenses of insurance companies from 1900 to 1910, in- 



6 [Assembly 

elusive, particularly in connection with legislation, was had by 
the Superintendent of Insurance. The testimony and exhibits 
therein, together with the formal report of the Superintendent, 
were transmitted by the Executive to the Legislature on April 
11, 1910. 

It appears from the report made by the Superintendent of In- 
surance, that three loose-leaf ledgers, covering the transactions 
from 1900 to March, 190^5, of the firm of Ellingwood & Cunning- 
ham, stockbrokers, operating in ^ew York city, came into the 
possession of the Superintendent of Insurance; and that an ex- 
amination of these ledgers developed the existence therein of 
accounts with several former members of the Legislature, some 
of whom had been active on the insurance, railroads and rules 
committees. A partial examination of these accounts, in so far 
as they appeared in these ledgers, was made by the Superinten- 
dent of Insurance, but further enquiry was prevented by objec- 
tion raised as to the power of the Superintendent of Insurance 
to proceed further wdth the investigation. 

Prior to the appointment of the Committee, the Superintendent 
of Insurance had ascertained that the remaining books, papers 
and records of the firm of Ellingwood & Cunningham were in the 
possession of Mr. Cunningham, and stored by him in a barn situ- 
ated in Montclair, in the state of ^ew Jersey. Whereupon the 
Superintendent of Insurance caused the same to be placed under 
constant surveillance. Upon the organization of this Committee, 
the Superintendent of Insurance placed at the disposal of the 
Committee the evidence taken by him in the investigation con- 
ducted by him, together with the loose-leaf ledgers of Ellingwood 
& Cunningham, and all other documents and papers which he had 
in his possession. 

Immediately upon the organization of the Committee, it under- 
took the surveillance of the books and papers of the firm of Elling- 
wood & Cunningham, at Montclair, N. J. These, in the mean- 
time, had been moved to a warehouse. After service of subpoena 
duces tecum upon Mr. Cunningham, thorough examination was 
made of all of these books and papers, at the warehouse in Mont- 
clair. This work consumed several weeks and was attended with 
many difficulties. The books and papers filled ten large packing 



'No, 30.] 7 

cases, were not indexed or systematically arranged. After the 
examination was completed, the books and papers fonnd on such 
examination to be necessary and material to the inquiry were 
removed to the offices of the Committee, at ^o. 55 Liberty st:reet, 
in the city of ISTew York. 

On the examination made at Montclair, there were fonnd 
missing from these records and papers some 40,000 cancelled 
checks of the firm, ten letter books, two stub checkbooks and two 
blotters, and a deposit book which contained a specific descrip- 
tion of each check and draft deposited by the firm after April, 
19 02, all of which were of the utmost importance to the investi- 
gation, and the absence of which seriously hampered the work of 
the Committee and increased its difiiculties. The whereabouts 
of these books and papers, or the time of their abstraction, the 
Committee was unable to determine. 

An examination of the records which remained, together with 
an examination of Mr. Cunningham, Mr. G. Tracy Rogers and 
several former employees of the firm, established the following: 

First. — The firm of Ellingwood & Cunningham was formed in 
1893 for the purpose of doing a general brokerage business, 
having offices at No. 41 Wall street. New York city. It was 
composed of C. H. Ellingwood and James W. Cunningham, nintil 
the year 1900, when G. Tracy Rogers was admitted as a special 
partner on his investment of $100,000 cash in the firm. In 
October, 1902, Mr. Ellingwood retired from the firm and in 
January, 1905, Mr. Rogers retired. Whereupon Mr. E. M. 
Black, one of the clerks of the firm, became a general partner. 
Some six weeks thereafter the firm made an assignment for the 
benefit of its creditors. Subsequently an involuntary petition in 
bankruptcy was filed against the firm in the United States Dis- 
trict Court for the Southern District of IsTew York, which was 
withdrawn some sixty days later, after a settlement had been made 
by the firm with its creditors. 

Second. — During the time G. Tracy Rogers was a special part- 
ner, several members of the Legislature and other persons inter- 
ested in legislative affairs had accounts with the firm. Many of 
these accounts appeared regular in all respects and contained no 
unusual items which called for explanation. Others, to which 



i' 8 [Assembly 

reference is hereafter niadej were evidently carried primarily not 
for the purpose of dealing in stocks and securities, but for the 
purpose of facilitating and concealing the transfer of moneys to 
the legislators in whose names the accounts stood. 

Third. — At the time G-. Tracy Rogers became a special part- 
ner, he was the president of the Street Eailway Association of 
the state of 'New York, an asisociation organized in 1883, and 
still in existence, the ostensible purpose of which was the acquisi- 
tion of experimental, statistical and scientific knowledge relating 
to the construction, equipment and operation of street railroads 
and the diffusion of this knowledge among the members of the 
association. The membership of this association comprised 
nearly all the important street railway companies within the 
state, together with certain associate and allied members consist- 
ing of individuals, co-partnerships and corporations, engaged in 
the manufacture, selling and dealing in railway supplies and ma- 
terials. Mr. Rogers continued as president of this association 
from 1894 until 1903. 

Fourth. — During Mr. Roger's encumbency of the office of 
president of the association, he represented it at Albany during 
the sessions of the Legislature in matters of legislation affecting 
its members. Shortly after he became president, upon his sugges- 
tion and with the approval of the executive committee a system 
was inaugurated of levj-ing assessments upon the various railroad 
companies which were members of the association in proportion 
to their gross earnings, to raise funds with which to promote the 
interests of these members of the association in matters of legisla- 
lation. At first these assessments were fixed at one-tenth of one 
mill upon the gross earnings. Later this was raised to two-tenths 
of one mill, and, in addition thereto, from time to time, as, in the 
judgment of the president, exigencies required, special assess- 
ments were laid on the members for the purpose of raising addi- 
tional funds. Many of the books and records of the association, 
including minutes of the secretary, records of the treasurer, and 
correspondence of its officers have been lost or destroyed. The 
officers testified that they were unable to produce them, and were 
ignorant of the cause or manner of their disappearance. On ac- 
count of the loss of these records, the exact amount contributed 



JSTo. 30.] 9 

by the members of tbe association to this fund cannot be ascer- 
tained, but that it was large appears from the fact that during 
the months of June and July, 1903, $25,0'0O was forwarded to 
Ellingwood & Cunningham and by them placed to the credit of 
legislators. 

Fifth. — ■ The distribution of this fund was wholly under the 
control of the president of the association and he was not called 
upon at any time to account, either to the executive committee or 
to the association, for the manner of its use. There were three 
methods used in transferring these funds, namely: 

. a. By depositing from time to time with the firm of 
Ellingwood & Cunningham sums of money directly to the 
credit of these members of the Legislature, which sums were 
subsequently either withdrawn by them, or used by them for 
the purpose of trading in stocks and bonds. 

b. By depositing from time to time with the firm of El- 
lingwood & Cunningham to the credit of a confidential clerk 
of the firm, sums of money which were subsequently trans- 
ferred to the accounts of these legislators. 

c. By making contributions directly to the campaign funds 
of the political parties in the districts represented by these 
members of the Legislature, and <to the funds of the state 
committee of the dominant parties. 

Sixth. — Henry A. Robinson, attorney for the Metropolitan 
Street Railway Company of ^N'ew York, was the secretary and 
treasurer of the association from 1894 to June, 1903. In June, 
1903, Robinson resigned as treasurer and the executive com- 
mittee of the association selected a new treasurer to act until the 
annual election of officers in October of that year. In October, 
190^3, an entirely new set of officers v/ere elected by the associa- 
tion and a new policy adopted, at least temporarily. The levying 
of assessments was apparently abandoned. This change of policy 
was evidently a matter of ^^ policy," since the evidence shows that 
the collection of the unpaid assessments continued. 

Various methods were resorted to by the treasurer and the 
members of the association to cover up these assessments, and 
among others may be noted, the assessment of $8,000, collected in 



10 [Assembly 

July, 1903, from the Metropolitan Street Railway Company on 
behalf of the Third Avenue Railway Company. The evidence 
shows that in order to conceal the real nature of the transfer of 
$8,000 of the moneys of the Third Avenue Railway Company for 
legislative purposes, the following ingenious and despicable 
method was adopted: A voucher and draft for this amount was 
drawn to the order of the treasurer of the Street Railway Asso- 
ciation, as attorney, in settlement of a fictitious claim for per- 
sonal injuries to one Charles Lankeman. It recited upon the 
face of the voucher that the injuries were received by Lankeman 
'^ On May 1st, 190i2, at 99th Street and Third Avenue, on car 
247, run 70, trip I^o. 1, north-bound: that the claimant, a pas- 
senger on the car, was standing on the rear platform: that the car 
came to a stop at 99th Street and started with a sudden jerk, 
throwing the claimant from the rear of the car to the street, 
which resulted in injuries to his back and spine, shock and con- 
tusion.'' 

The treasurer of the Street Railway Association indorsed this 
draft as attorney and also indorsed it as treasurer of the associa- 
tion, and deposited it to his credit as treasurer, and it was paid 
in due course. Later this money found its way into these ac- 
counts carried by EUingwood & Cunningham. 

The treasurer of the Street Railway Association testified that 
he never knew Mr. Lankeman, and never had heard of any such 
person, or accident, that he was not an attorney-at-law, nor was 
he the attorney-in-fact for Mr. Lankeman, and knew nothing 
about any such accident. An examination of the officers of the 
company failed to reveal that any such accident had ever oc- 
curred or that there was any such person as Mr. Lankeman. This 
was evidently a mere invention and subterfuge for the purpose 
of concealing the transfer of this $8,000 by the Metropolitan 
Street Railway Company to the treasurer of the association for 
legislative purposes. 

The surviving records of the association were so meagre and 
fragmentary and the ^disappearance of the great bulk of them so K 
extraordinary and inexplicable as to raise a grave suspicion that 
similar methods may have been resorted to at other times. 

It w^ould seem that in deference to the new order of affairs in 



Ko. 300 11 



matters of legislation and pnblic service, the association, in 1904, 
permanently abandoned the methods which it had followed in 
matters of legislation. 

Seventh. — On the IGth day of March, lOOiO, a hill was intro- 
duced in the Senate, entitled : 

"An Act to amend the Transportation Corporation Law 
by addition thereto of a section in relation to extending 
roads and extensions.'^ 

This bill passed the Senate on March 29, 1900'. On the date 
of its passage it was transmitted to the Assembly and was im- 
mediately reported by the committee on rules, and passed by the 
Assembly on April 5, 1900, the day before the final adjournment 
of the Legislature. It subsequently became a law and constitutes 
chapter 567 of the Laws of 1900. Under this act it became 
possible for the New York Transportation Company, a public 
service corporation, operating in the city of IsTew York, to greatly 
extend- its franchise. 

It appears from the books of Ellingwood & Cunningham, that 
prior to the passage of this act and shortly thereafter several 
members of the Legislature, some of whom were members of the 
committee on railroads and of the committee on rules, came into 
the possession of a large amount of stock of this company. These 
blocks of stock so held were at least in two instances purchased 
through Ellingwood & Cunningham and paid for by Rogers with 
the proceeds of a check received from the president of the Metro- 
politan Street Railway Company. In other cases, the stock was 
deposited by members of the Legislature with Ellingwood & Cun- 
ningham and carried by them until May, 1901, when a pool of 
1,400 shares, made up of the holdings of various members of the 
Legislature and other persons connected therewith, were delivered 
to a member of the committee on railroads of the Senate and by 
him sold to an unknown purchaser at 14, at a time when the same 
stock was selling in the open market at 4%, and the following 
month sold down to 1%. 

This bill, though general in its character, could possibly affect 
no corporation except the E'ew York Transportation Company. 
It was introduced by a Senator who represented no part of the 



12' [Assembly 

territory in whicli this corporation operated. He testified that 
it was handed to him by a Senator also representing a district 
wholly without the territory in which this company operated ; that f^ 
he neither asked nor received from the Senator who gave it to 
him any. statement or explanation as to its provisions or the 
source from which it came. 

Eighth. — The evidence shows that between April, 1900, and 
March, 190'3, the account of the chairman of the committee on 
railroads in the Assembly during those years was credited upon 
the books of EUingwood & Cunningham with the sum of $24,281, 
none of which came from him directly, but all of which was con- 
tributed either by checks of the president or attorney of the Met- 
ropolitan Street Eailway Company or the treasurer of the Street 
Railway Association, or by the checks of the president of the 
Street Railway Association. 

The evidence also shows that the account of a member of the 
committee on railroads of the Senate was credited on the books 
of the firm of EUingwood & Cunningham, between April, 1900, 
and July, 19 Oil, with $24,8€0, all of which came through checks 
of the president of the Metropolitan Street Railway Company or 
the attorney of said company or the treasurer or president of the 
Street Railway Association. 

The ex23lanation of these accounts given by the persons in whose 
names they were carried and by Rogers, were that these transfers 
were made by Rogers either in payment of his personal indebt- 
edness to them or as political cond:ributions, and that they 
had no knowledge of the sources from which he obtained the 
money. 

It is apparent that the firm of Elling^wood & Cunningham was 
used during these years by Rogers, acting for the Street Railway 
Association, as a clearing house through which to transfer money 
from the treasuries of the various railroads belonging to the 
association to the individual accounts, of certain members of the 
Legislature and political organizations, whom they deemed useful , 
in the proitection and proanotion of their interests in matters of ^\ 
legislation. 



'No. 30.] 13 

II. 

COERUPTION AI^D CoERUPT PPvACTICES ShOWN TO ExiST BY THE 

Evidence iisr the Investigation had by the Senate DupvING 

THE Eegulae Session of 1910. 

An examination of the evidence received in the investigation 
had before the Senate during the regular session of 1910 shows 
that all matters therein developed indicating corrupt practices 
5vere fully explored either upon the direct or cross-examinations 
of the witnesses, save the allegations with reference to alleged 
irregularities in the purchase of State lands, which was made the 
subject of special investigation by the Executive. 

The chief prosecuting witness before the Senate was examined 
at length by the Committee and his examination, although ex- 
haustive, elicited no facts indicating corrupt practices other than 
those concerning which he had testified before the Senate. At 
the close of his examination he stated that he had no knowledge 
of any other corrupt practices in connection with legislation or 
public officials. 

Some additional facts, however, were developed by the ex- 
amination of this and other witnesses, concerning the attempt 
liiade in 190'5 by certain bridge companies doing business in this 
state to raise by assessment a fund of $10,000 for the purpose of 
influencing legislation. It appears that a meeting of the repre- 
sentatives of these companies was held at Syracuse, in January, 
1905. After considerable discussion they decided to raise a fund 
x)i $10,000 for this purpose. A custodian of the fund was ap- 
pointed and the sum of $1,950 paid in. The scheme was subse- 
quently abandoned on account of the failure of some of the com- 
panies to pay their assessments, and the money raised was re- 
turned to the contributors. 

III. 

Allegation of Corkupt Practices in Connection with 
Legislation Relating to the Payment by the State of 
A Beet Sugar Bounty. 

On the 3d day of August, 1910, at a hearing held at Geneva, 
!N". y., before Charles A. Hawley, Esq., Beferee in Bankruptcy, 



14' [Assembly 

in a proceeding against the Lyons Beet Sugar Kefining Com- 
pany, a corporation formerly engaged in the manufacture of beet 
sugar at Lyons, in the state of New York, Harry F. Zimmerlin 
testified that in the years 1905 and 190i6 he paid to two members 
of the Legislature, on behalf of the company, certain sums of 
money in consideration of their action, at the sessions of the 
Legislature for those years, upon matters of legislation affecting 
the beet sugar industry. 

This fact having come to the attention of the Committee, a 
thorough investigation of the evidence and proceedings had in 
bankruptcy, together with the books, records and correspondence 
of the company was made. The book-keeper and treasurer of the 
company, together with its former presidents, were examined. 

It appears from the evidence of Zimmerlin that for several 
years the company employed him to attend the sessions of the 
Legislature to promote legislation giving a bounty for the produc- 
tion of beet sugar in this state. 

He testified that shortly after the adjournment of the Legis- 
lature in 1905, he paid, at the 'Capitol, $3,000' in cash to a mem- 
ber of the Senate, and $3,000 to a member of the Assembly, of 
which latter amount $1,500 was for the member's use and the 
other $1,500 was '^ to use as he saw fit." This money, he stated, 
he had received from the president of the company for this pur- 
pose. On the morning following the day when he gave this evi- 
dence, he asked leave to correct this testimony, stating that he 
then recollected that the amount which he paid to the member 
of the Assembly was $1,500 instead of $3,000. He further testi- 
fied that after the session of 1906 and also after the session of 
1907, at which sessions similar appropriations were made, he 
paid the same member of the Senate $3,000 each year, and that 
he also paid an employee of the Assembly the sum of $300, in 
1905, and in 1906, $250. 

Frederick Steigerwald, who was the president of the company 
during these years, was examined and testified that after the 
adjournment of the Legislature in 1905, 1906 and 1907, Zim- 
merlin requested of him these sums of money for the purpose of 
payment to the members of the Senate and the Assembly men- 
tioned by him, and that in response thereto he delivered to him 



1^0. 30.] 15 

for that purpose in the years 190'5^ 190'6 and 1907 drafts for the 
sums mentioned. 

A searching examination of the books and records of the com- 
pany, together with an exhaustive examination of the witnesses 
called before your Committee, failed to elicit any corroborative 
evidence. The evidence of Zimmerlin, who testified as to these 
alleged payments, was singularly incomplete with reference to the 
details of each of the transactions. He could not recollect any 
material extrinsic circumstances or facts surrounding them. 
Moreover, the evidence reveals that notwithstanding appropria- 
tions had been made for this purpose at each annual session of 
the Legislature from 1897 to and including the session of 1908, 
no other suggestions relative to payments in other years were ever 
made, although Zimmerlin testified that he was present at Albany 
actively promoting similar legislation in each of the years men- 
tioned, during which time the members accused were members of 
the Legislature. 

The Committee is impressed with the significance of the fact 
that each of the legislators to whom it was alleged payments were 
made is dead, and unable to face his accuser. 

In the absence of corroborative evidence and in view of the 
appearance of the witness Zimmerlin upon the stand, his manner 
of testifying, and his very apparent confusion of mind, the Com- 
mittee cannot conclude or report that these payments were made 
to the members as alleged. 

IV. 

Allegatioist of Corrupt Practices jn Co]^iNrECTioj:^ with 
THE Ai^ti-Eace Track Gamblit^g Biles Duriis-g the Regu- 
lar AisTD Special SESsioi^fs of the Legisl^iture of 1908. 

The wide-spread publication in the public press of rumors and 
assertions that a corruption fund amounting to several hundreds 
of thousands of dollars had been raised for the purpose of pre- 
venting the passage of the anti-race track gambling bills, pending 
at the regular and extraordinary sessions of the Legislature in 
1908, together with admissions made by persons active in opposi- 
tion to these bills which were brought to the attention of the Com- 



16 [Assembly 

mittee, led it to enter upon an investigation of tlie trutli of these 
rumors and accusations. 

In the course of this investigation it called and examined all 
persons whom it was believed had any knowledge or information 
upon the subject and also caused to be examined the books and 
records of various racing associations in the state of 'New York, 
together with the, books and records of the Metropolitan Turf 
Association. 

The evidence shows that in 1908 one Frank J. Gardner was a 
lobbyist at Albany, and that he was retained to attempt the de- 
feat of the anti-race track gambling bills. It further appeared 
that Gardner and certain other persons associated with him estab- 
lished themselves in a hotel in Albany and either directly or 
through others approached a number of legislators with offers of 
large sums of money in consideration of their voting against the 
passage of these bills. The Committee has been unable to defi- 
nitely fix the amount of money at the disposal of Gardner and his 
associates, but it appears in the evidence, that Gardner offered 
to one legislator as a consideration for his vote against the bills, 
the sum of $100,000. 

When the Committee entered upon the investigation of this 
matter, it discovered that Gardner was without the state, and, 
therefore, beyond the reach of a subpoena. The Committee lo- 
cated him in a city in a sister state, and, when it ascertained that 
he would not return voluntarily to the state, it gave the district 
attorney of the county of 'New York sworn information which 
resulted in the indictment of Gardner in the county of ISTew York, 
for the crime of attempted bribery. 

The district attorney at once caused Gardner's apprehension in 
the foreign jurisdiction where he then was and instituted extra- 
diction proceedings, but, before such proceedings were terminated, 
Gardner voluntarily returned to the county of l^ew York, where 
he was arraigned and admitted to bail. The Committee imme- 
diately caused a subpoena to be served upon Gardner, directing 
him to appear before it. He appeared, was sworn, but refused to 
give any testimony on the ground that he was then under indict- 
ment, and that any evidence he gave might tend to incriminate 
or degrade him, IJnder these circumstances the Committee prq-. 



No. 30.] 17 

ceeded to examine otlier witnesses whom, it was informed had 
knowledge of Gardner's activities in Albany in connection with 
the attempt to defeat these measures. 

It had come to the attention of the Committee, that in the 
spring of 1910, while Eobert H. Elder, Esq., an assistant district 
attorney in the county of Kings, was making an investigation 
relative to the prosecution of certain indictments which had been 
found by the grand jury of the county of Kings, that Gardner 
had admitted to Mr. Elder that he was actively engaged in Al- 
bany in 1908 in endeavoring to prevent the passage of the anti- 
race track gambling bills. 

Mr. Elder was called to give evidence of these admissions, of 
Gardner. He testified that in March, 1910', Gardner had stated 
to him that during the pendency of these bills a meeting was held 
in the city of New York, at which various persons interested in 
racing and representatives of the Metropolitan Turf Association 
were present, and that a fund was then subscribed aggregating 
several hundred thousands of dollars for the purpose of prevent- 
ing the passage of these bills ; that $10,000 was paid to one legis- 
lator for his vote and large sums of money were disbursed to 
other persons for the purpose of bringing about the defeat of the 
measures. 

It also appears from testimony given by other witnesses that 
Gardner was in Albany during the pendency of these measures 
before the Legislature ; that he approached several members thereof 
with oifers of money in consideration of their votes against the 
measures and sought to induce other legislators to meet him at his 
room in the hotel where he was making his headquarters. It fur- 
ther appeared that he exhibited in his hotel a large sum of money, 
which, he said, was to be used to secure votes against the bilL 

Gardner, in the admissions mjado by him to Mr. Elder, men- 
tioned the names of several legislative correspondents, of the public 
press and others, to whom, he said, sums of money had been paid. 
This evidence was not corroborated and in each instance these per- 
sons appeared voluntarily before the committee and denied in 
toto the truth of this statement. 

The Oommittee sought to examine each of the persons whom 
Gardner stated wore present at the meeting held in New York 



18 [Assembly 

when tlio fund for the purpose of preveniting the passage of these 
measures was said to have 'been subscribed, but by reason of their 
having left the jurisdiction of your Oommittee^ and their con- 
tinued absence therefrom v^hen their presence was desired, and 
their failure to return up to the time your Committee's pov^er to 
call and examine witnesses expired, it was unable to obtain their 
evidence. 

There is also evidence tending to show that other attempts were 
made to induce members of the Legislature to vote against these 
measures, and that as much as $45,000 was offered one member 
of the Senate in consideration of his either opposing the bills 
or refraining to vote in favor thereof, and upon his refusal a threat 
was made that he would not be renominated at the ensuing election. 

The Committee examined the books and records and some of 
the officers of the Jockey Club, and of the various racing associa- 
tions in the state. The evidence shows that these organizations 
in their opposition to these bills expended large sums for pub- 
licity in order to create public opinion in opposition to the meas- 
ures. It appears that one of the eight racing 'associations expended 
some $17,000 for the purpose. The aggregate legal expenses of 
these bodies in 1908 amounted to about $162,000. There is no 
evidence, however, that any of these ex]3enditures were for illegal 
purposes. 

The Committee endeavored to examine the offijcers of the Met- 
ropolitan Turf Association and its books and records, but the only 
officer of the association which your Committee could reach with 
subpoena was the treasurer, who testified that all the books and 
records of the financial dealings of the association that were ever 
kept had been destroyed with the exception of a single check-book. 



Alleciatiopst of CoRRurT Practices in CoNNECTioisr with 
Amejn^dments to the Agricultural Law with Reference 
TO Milk During the Session of 1909. 

The Committee's attention was called to the fact that in a pro- 
ceeding pending in the Supreme Court of the County of ^ew 
York, entitled ''In ihe Matter of the Petition of Edward R. 



iS^o. 30.] 19 

O'Mallej, Attorney-Genea-al of the -State of New York, for an 
order directing Charles H. 0. Beakes and others to appear before 
a referee for examination pursuant to article 22, ehapter 20, of 
the Consolidated Laws of the State of 'New York, known as the 
General Business Law/' conducted during the months of January 
and February, 1910, certain testimony had been given tending to 
show that a fund of money had been raised by milk dealers operat- 
ing in Greater New York, for the purpose of opposing the enact- 
ment into law of an amendment to the Agricultural Law of this 
state, which was subsequently passed and became chapter 9 of 
the Laws of 190'9, providing, in brief, that milk and cream should 
contain 12 per cent, solids and that the production, sale and dis- 
tribution of milk and cream should be subject to certain State 
inspection. 

An investigation into thesa allegations was made, witnesses 
examined, and an eifort made to examine the books and docu- 
ments of certain milk dealers' associations. It appeared that prior 
to October 1, 1909, there was in existence an incorporated organi- 
zation called the Milk Dealers' Protective Association, which 
numbered among its members about twenty^five wholesale milk 
dealers in the city of ^STew York. The evidence also showed that 
about October 1, 1909, three other milk dealers' associations were 
formed, to wit: The Harlem and Bronx Milk Dealers' Associa- 
tion, the Brooklyn Milk Dealers' Association, and the West Side 
Milk Dealers' Association, the members of which associations 
were likewise wholesale milk dealers operating in Greater New 
York. 

When the Cgmmittee sought to examine the books and records 
of the Milk Dealers' Protective Association it was found that it 
could not obtain the books and records of that association ante- 
dating October 1, 1909, and the secretary of that association 
testified that such books and records had been destroyed by him. 

From such books and records, however, as were produced, it was 
made to appear that during the years 1909 and 1910 these four 
milk dealers' associations levied upon their members assessments 
ranging from twenty-five to fifty cents for each can of milk sold 
by each member on a certain day, and by that method there was 
raised about $10,000. It was further developed that more than 



20 [Assembly 

one-half of this amount remains in the hands of the officers of that 
association and that the balance had been expended for defraying 
the expenses of collecting lost cans belonging to members of the 
association and in conducting analyses of milk distributed in this 
territory. 

The evidence given and such records as the secretary of the asso- 
ciation did not destroy, does not show that any of this money so col- 
lected by assessments or any other money has been used corruptly 
in any attempt either to oppose or promote the passing of the 
amendment to the Agricultural Law above mentioned, or any other 
law pending before the Legislature. 

Numerous allegations and rumors, anonymous and otherwise, of 
corrupt practices in connection with other matters of legislation, 
came to the attention of the Committee, and considerable time of 
the counsel and other assistants of the Committee was consumed 
in endeavoring to ascertain whether or not there was any substan- 
tial evidence in support of these allegations and rumors. 

The investigation shows clearly the extreme difficulty of secur- 
ing exact information which will disclose the methods by which 
powerful financial interests seek to control legislative action in 
matters coming before legislative bodies. 

The crime of bribery is one of the most difficult of all crime!** 
to uncover. All the resources of ingenuity are used to conceal it, 
and only in exceedingly rare instances are either of the parties to 
the crime willing to come forward and disclose the facts. 

The statute requiring corporations and associations doing busi- 
ness in the state to file with the Secretary of State itemized 
annual statements duly verified, showing in detail all expenses 
paid and incurred in connection with legislation pending at the 
provioas session of the Legislature, including disbursements or 
compensation paid or payable to counsel or agents, although not 
always complied with, has undoubtedly been a powerful influence 
in correcting conditions which may have existed in the past. The 
statute has produced a degree of publicity which did not exist 
previous to its enactment, and it is to publicity more than to any- 
thing else that the public must look for the prevention of condi- 
tions directly encouraging improper relations between members 



m, 30.] 21 

of legislative bodies and financial interests whicli may be affected 
by legislative action. 

Legislative procedure/ so far as the state of IN^ew York is con- 
cernedj is improving. It is more deliberate, and the records of 
legislative proceedings in committee and otberwise are more care- 
fully made and preserved. The recent revision of the Kules of 
the Senate and Assembly are steps in the right direction, and in 
view of these amendments your Committee makes no suggestions 
at this time. 

'The evidence before the Committee satisfies it that legislative 
methods and conditions have greatly improved, and it believes that 
an aroused and enlightened public sentiment will result in further 
advances in the adoption of other and further "measures tending to 
minimize the opportunity of outside interference in legislative 
procedure. 

The establishment of the Public Service Commission and the 
giving to various dej>artments of State government a larger con- 
trol of public institutions and activities has decreased measurably 
the field of operations of the lobbyist. An opportunity is now 
given to all parties interested in the administration of public 
business for impartial and deliberate consideration of their rights, 
interests and obligations. Questions of importance receive a de- 
gree of consideration which is impossible for them to have in the 
somewhat hasty deliberations of legislative bodies. All proeeed- 
ings become a matter of permanent record, and whether before a 
public service commission or some other dej)artment of State gov- 
ernment, subjects in which the public is interested and their rela- 
tions to public and private interests are given a degree of careful 
consideration very similar to that which takes place in courts of 
justice and to some degree under rules similar to those governing 
the action of our courts. 

In concluding its report on this branch of the investigation, the 
Committee suggests that the most effective j)reventative of legis- 
lative corruption rests with the people themselves — a searching 
scrutiny of the fitness of candidates and a strict accountability of 
representatives to their constituents. 



S'S [Assembly 

In view of tiie facts established by the evidence the Committee 
recommends that article 124 of the Penal Law be amended by the 
addition of a new section providing that if a member of either 
House composing the Legislature of this state shall be offered 
a bribe, or any money, property or value of any kind, in considera- 
tion of his vote, or of his absenting himself from the House of 
which he is a member, or from any committee thereof, or if any 
person shall attempt, directly or indirectly, by menace, deceit, 
suppression of truth or other corrupt means, to influence a member 
to give or withhold his vote or to absent himself from the House 
of which he is a member or from any committee thereof, such mem- 
ber shall immediately, if the House of which he is a member be in 
session, or at the next session thereof, submit the facts in relation 
thereto to the House of which he is a member, and to the district 
attorney of the county in which the offer or promise was made, 
and that a violation thereof shall be punishable by imprisonment 
for not more than ten years or by a fine of not more than $5,000, 
or both, together with a forfeiture of his office, and disqualifica- 
tion from ever afterward holding any office under this state. 



1^0. 30.] 23 

FIRE INSURANCE. 

PART I. 

INTRODUCTION AND GENERAL OUTLINE OF THE BUSINESS. 

ISTTRODUCTIOX. 

The investigation which was made by the 'SuiDerinteiident of 
Insurance in the spring of 1910' concerning the legislative activi- 
ties of fire insurance companies brought into prominence the fact 
that the companies were stronglj?- against certain bills which are 
proposed at nearly every session of the Legislature; these are 
commonly known as ^^anti-compact" and ^S^alued policy" bills. 

When this Committee was created by the Legislature and 
directed, among other things, to investigate the subject of fire 
insurance it was very largely in the hope that these questions could 
be thoroughly studied and that conclusive grounds could be found 
either for passing such measures or for rejecting them. 

Both for this reason and because of the great importance of fire 
insurance to citizens of all classes your Committee gave a great 
deal of careful attention to this side of the inquiry. 

The public hearings on fire insurance began on the 2'2d day 
of ISTov^mber, 1910, and ended on the 6th day of January, 1911. 
Altogether, 117 witnesses were examined, representing all the 
interests involved, — the premium payers — the insured, officers 
and managers of companies, mutual fire insurance underwriters, 
managers of rating bureaus, expert raters, adjusters, statisticians, 
local agents, brokers, interinsurers, attorneys-in-fact for Lloyds, 
'New York State Insurance Department officials, insurance com- 
missioners of other states, fire department officials, officers and 
members of fire prevention associations, merchants, officers of 
trade organizations and others. Leading men in their special lines 
the country over were examined and conditions in New York 
state were thus compared with those existing in Massachusetts, 
Rhode Island, Pennsylvania, Ohio, Illinois, Missouri, Wisconsin, 
Texas and Michigan. 

In considering the proper scope of this inquiry the Committee 
first satisfied itself that the Superintendent of Insurance and his 



M [Assembly 

corps of examiners had brought before the public all matters per- 
taining to fire insurance legislation^ which gave evidence of or 
tended to establish any improper attitude on the part of the com- 
panies toward legislation. The record of the testimony taken 
before the iSu|)erintendent of Insurance is voluminous and shows 
that this i>hase of the question was treated exhaustively. It was, 
therefore, deemed of more public importance to direct the 'Com- 
mittee's inquiry toward the economic problems of the business. 

It may be said at the outset that the subject of fire insurance 
differs from that of life insurance, concerning which an exhaustive 
legislative investigation has been had in recent years, in one very 
important particular. In life insurance, because of the fact that 
the contract stretches over a great number of years and that the 
premiums in the early years of the policy must be largely laid 
aside against the latter years, it is necessary to collect a very large 
reserve. The records of the Insurance Department show that iii 
each of the three large E^ew York life insurance corporations the 
reserve amounts to more than four hundred million dollars. In 
fire insurance, however, as the contract is made from year to year, 
or at any rate for a very short term, the entire reserve is small in 
comparison, amounting on all of the 163 stock companies doing- 
business in this state to only about two hundred and thirty-three 
million dollars — hardly more than half the reserve of a single 
one of the life insurance companies. The temptation to use the 
large funds at its disposal in a questionable manner, which was 
shown to have been, at the time of the investigation, one of the 
weak points in the system of life insurance, does not exist in fire 
insurance, for the reason that the large funds do not exist. 

The Committee, recognizing the technical character of the sub- 
ject and the desirability that it should be presented in a logical 
and consecutive manner, attempted, so far as it was possible, to 
take up its details according to the following plan: 

The companies and their relation to the State — State 
supervision. 

'Statistics regarding the amount and character of the fire 
insurance business. 

The organizations among the companies. 



]^o. 30.] 25 

The principles involved in the furnishing of fire insurance 
inclemnitj. 

The interior organization of a company — its officers and agents. 

The actual detailed work of a company — getting and doing 
business. 

The settlement of losses — adjusting. 

The theory of rating. 

Rating organizations. 

The ^ew York Fire Insurance Exchange. 

The Suburban Fire Insurance Exchange. 

The Underwriters' Association of l^ew York State — the Up- 
state Association. 

Factory Mutual Insurance Companies. 

Miscellaneous Mutual Insurance Companies. 

Town and County Co-operative Insurance Companies. 

Interinsurance Associations. 

Lloyds. 

Local agents and their problems — the expense problem. 

Brokers. 

Complaints by the insured and the answers thereto by the 
companies. 

Fire prevention. 

The j)roblems of the business, so far as they concern the State, 
are mostly in regard to the so-called stock fire insurance com- 
panies, and not only that but they are largely concerned with the 
subject ()f rating and expense. In this report the discussion of the 
matters concerning Avhich testimony was received will be made to 
center around these problems. In Part I of this report will be 
given an outline of the business and in Part II a more careful 
analysis of the problems iilvolved. 

Extent of the Business. 

It is impossible to know exactly the magnitude of the fire insur- 
ance' business. The following figures, however, are suggestive : 

One hundred and sixty- three stock companies, licensed to do 
business in this state, had risks in the United States on December 
31, 1909, aggregating over forty billions of dollars; on these, 



26 . [Assembly 

during 1909^ tliej received net premiums amounting to about 
two hundred and seventy-one millions of dollars. 

Besides these companies there are other stock companies, not - 
admitted to this state, mutual companies, interinsurers and 
Lloyds, which must bring the total amount at risk in this country 
well up toward fifty billions of dollars. 

Impoetance of Fike Ii^suean^ce. 

The importance of the business of fire insuranjce can be inferred 
from the fact that the annual fire loss of this country is in the 
neighborhood of two hundred and fifty millions of dollars — a 
destruction equivalent, in relation to the building operations of 
the country, to a destruction of one house out of about every four 
that are built. Fire insurance is an agency for distributing this 
loss over the whole community, so that it shall not deal a crushing 
blow to those who have suffered. The importance of insurance 
has, however, gone far beyond the point of being simply a system 
of distributing loss ; it is quite as important because of its potential 
indemnity, that is, because of the state of security which it 
produces. 

It is readily recognized that to-day the financial operations of 
the world are on a basis of credit. A paralysis of credit produces 
disastrous results, in panics and financial depressions. The credit 
system, however, is founded on the institution of insurance; with- 
out insurance it would be impossible to get a loan on a cargo of 
wheat or to mortgage a house or for a retailer to buy on time- 
payment a bill of goods from a wholesale merchant. Insurance 
is the foundation of the modern credit system, and by just so much 
as the welfare of society is founded on the free operation of credit 
by so much is the institution of insurance of importance to the 
public, quite aside from its value in actually distributing loss. 

Oeganization and Admission" of Insueance Companies. 
The Insurance Law of the state of iN"ew York provides for the / 

V 

organization in this state, or the admission from other states or 
countries, of several classes of insurance organizations. 

First. 'So-called stoek companies. These are corporations or- 
ganized to do the business of fire insurance. Such a company of 



l^o, 30.] 27 

this state, to be organized, or of otlier states, to be admitted, must 
have a capital of at least $20'0,0'00 and a surplus equal to at least 
50 per cent, of the capital. 

There were on December 31, lOOiO, 44 such companies of ^ew 
York state, having a total amount at risk of about eleven and one- 
half billions of dollars. There were 88 companies of other states, 
having a total amount at risk of a'bout eighteen billions of dollars. 

The 132 stock companies doing business in this state had risks 
the country over aggregating twenty-nine and one-half billions of 
dollars, net premium receipts in 1909 of about two hundred mil- 
lions of dollars, an aggregate capital of about sixty-nine millions 
of dollars, and aggregate assets of about four hundred and six 
millions of dollars. 

Second. United 'States branches of foreign companies. (Such 
companies are required to have $200,000 deposited with State 
Insurance Departments, and $300,000 in the hands of trustees in 
the United States. 

There were on December 31, 190'9, thirty-one such companies 
admitted to do business in this state. Their aggregate amount at 
risk was ten and one-half billions of dollars, their net premium 
receipts in 1909 about seventy-one millions of dollars, their total 
assets 'about one hundred and seven millions of dollars. . 

Third. On December 31, 1909, there were five mutual com- 
panies of this state with an aggregate amount at risk of about 
twenty-four millions of dollars and aggregate assets of about six 
hundred and sixty-five thousand dollars. There were two mutual 
companies of other states with an aggregate amount at risk of one 
hundred and forty-five millions of dollars and aggregate assets of 
about two and one-half millions of dollars. 

There are at present about 175 town and county co-operative 
companies of this state. The total amount at risk is not obtain- 
able at present; ofiicers of two companies who appeared as wit- 
nesses before the Oommittee testified that their companies had 
total risks respectively of seven million dollars and fifteen million 
dollars. 

Fourth. The state to-day permits such Lloyds and interinsur- 
ance associations as were organized prior to October, 1892, to do 
business upon certain conditions specified in article 10 of the In- 



28 [x\sSEMBI.Y 

surance Law. In general it may be said that conditions governing 
these bodies of insurers are similar to those governing stock com- 
panies, with the excei^tion that no capital istock or guarantee fund /T^ 
beyond the unearned premium reserve is required. 

The Department has recognized seventeen Lloj-ds associations; 
on December 31, 19i09, these had aggregate risks of one hundred 
and fifty-two millions of dollars. The state has recognized three 
interinsurance associations ; on December 31, 1909, these had ag- 
gregate risks of one hundred and forty-seven millions of dollars. 

While these are all the fire insurance organizations which are 
expressly recognized hy this state, it should be added that there is 
a considerable amount of insurance which is placed with foreign 
Lloyds and stock companies, not admitted to this state, and with 
the factory mutual companies. 

In addition to the conditions already mentioned the state re- 
quires the companies to maintain funds sufficient to cover the un- 
earned portion of the premiums it has received on outstanding 
business. The purpose of this unearned premium reserve, as it is 
called, is threefold: first, to make it possible tO' pay policy- 
holders what is due them should they desire to cancel their policies ; 
second, to secure for the company a sufficient fund to reinsure its 
business with another company if that should be desirable; and, 
third, to protect a company against expected losses. 

The .Superintendent of Insurance is required, as part of the 
work of seeing that the companies are solvent and otherwise within 
the requirements of the law, to call for an annual financial state- 
ment from each of the companies and associations that are recog- 
nized by the Department, and he is directed to examine the affairs 
of each company in detail from time to time or as occasion de- 
mands. 

Obganizatio'^ts Among the Companies. 

The stock fire insurance companies, while they are in intense 
competition with each other, have found it desirable to do much of 
their work through organization among themselves. /' 

The National Board of Fiee Underwriters. 

In point of territory covered the greatest of these is the National 
Board of Fire Underwriters. The membership of this embr^ices 



Xo. 30.] 29 

124: of the leading companies. It lias been in existence since 1866 ; 
in its early years it endeavored to fix both rates and commissions 
for the whole of the United States, but this work proved imprac- 
ticable and was abandoned. Its principal function to-day is edu- 
cational, although to a certain extent it exerts a general infiuence 
toward uniformity and better practices in the business. It is the 
representative body which acts for the underwriters in matters of 
general importance to the companies and the public. The E^ational 
Board was represented^ for instance, at the Joint Conservation Con- 
ference in Washington in 1908 and at the ISTational Conservation 
Congress in St. Paul in 1910 ; at both meetings the board pre- 
sented through special committees addresses on the subject of fire- 
waste. 

The board, through a corps of engineers, carries on an extensive 
work in making surveys of the conflagration hazard in cities. A 
report is issued on each city surveyed ; this report is a basis for 
intelligent work in the betterment of conditions. 

The board, after an extensive study of the subject^ has prepared 
a model building code; the adoption of this code is urged upon 
cities and the board is prepared to co-operate further by furnishing 
expert advice along these lines. 

The board prepares statistics of fire loss and the causes of fires. 

It is in close touch with the E^ational Tire Protection Associa- 
tion and the Underwriters' Laboratories and issues a great num- 
ber of pamphlets, based on the work of these organizations as well 
as on the work of its own engineers, on the construction and in- 
stallation of devices of a protective or hazardous nature; these 
pamphlets are given a wide circulation. 

It can be said that the work of the JSTational Board is in the 
highest degree public spirited and its activities are to be highly 
commended. 

The E"ew Yokk Boaed of Fire Ui^deeweiters. 

The New York Board of Fire Underwriters is an incorporated 
body ; its members are the managers and agents of companies doing 
business in I^ew York city. It carries on somewhat the same kind 
of work as the ISTational Board, but its field of operation is confined 
to New York city. 



80' [Assembly 

It makes surveys of risks, promulgates standards of construction 
and equipment, and particularly of electrical equipment ; it investi- 
gates important fires, it maintains a bureau of fire patrol, whose 
function is to protect and save property in case of fire; it main- 
tains a bureau of adjustments which settles losses on which several 
companies are involved ; it interests itself in matters concerning 
water supply, the fire dep'artment, the fire alarm service, and the 
origin of fires. The board is represented by a delegate to the 
board of examiners of the building department. 

The ]^ew Yoek Fire Iistsueance Exchaistge. 

The New York Fire Insurance Exchange is an unincorporated 
body; it was organized in 1899; it comprises in its membership 
officers of local fire insurance companies and managers and head 
agents of out-of-town companies. Practically all the companies 
admitted to this state which do business in 'New York city are 
represented in this body. 

The area of operation of the Exchange is the so-called metropoli- 
tan district, or substantially the present city of New York exclu- 
sive of its suburban or outlying portions ; in other words, the 
borough of Manhattan, that part of the borough of the Bronx lying 
west of the Bronx river, the borough of Brooklyn, Long Island 
City in the borough of Queens, and the American Dock Stores 
and piers in the borough of Richmond. 

The object of the Exchange is the control of rates and commis- 
sions to agents and brokers; it fixes either specific or minimum 
premium rates on risks ; it fixes the compensation of brokers and 
certain classes of agents. Certain branch office managers, so called, 
are allowed a commission of 12% per cent, in addition to what 
they pay to brokers, and brokers are paid a commission of 5 to 
25 per cent., graded according to location and class of property. 
The highest commission, 25 per cent., is paid upon the so-called 
" preferred risks,'' namely, dwellings and private stables, churches, 
schoolhouses, and combined store-and-dwellings. 

The Exchange issues certificates to brokers whom it approves 
and without this certificate it is impossible for a broker to do busi- 
ness with its members. The conditions upon which a certificate 



No. 30.1 31 

is granted are first, that the broker must be engaged either ex- 
clusively in the insurance business or in real estate or closely allied 
employments, second, lie must pledge himself not to make any 
rebate to or division of commissions with any assured or any per- 
son not. a broker, third, he must pledge himself that he will not 
accept from any company or agent more than the commission al- 
lowed by the Exchange; fourth, he must pledge himself that he 
will not place risks with offices not members of the Exchange, un- 
less sufficient insurance thereon cannot be obtained from Exchange 
members. The twO' pledges are given herewith : 

Brokers' Pledge, Class I. — In consideration of the commissions 
or brokerages at the current rate that may be fixed and established 
for the time being by, and to be paid by members of, the 'New 
York Fire Insurance Exchange, I hereby promise and agree that I 
will not, directly or indirectly, make any rebate to the assured 
nor directly or indirectly pay to or divide with any person not 
holding ii broker's certificate, any commission or brokerage, nor 
will I receive from any company or agent, directly or indirectly, 
any remuneration for business placed with them in excess of that 
permitted by the rules of the Exchange. 

Brokers' Pledge, Class II. — In consideration of the pajTiicnt 
to be made to me of an additional 5 per cent, to the commissions 
or brokerages as provided for in broker's pledge, Class I, signed 
by me, I hereby promise and agree in addition to said pledge, that 
in placing insurance, I will give the preference to the members of 
the ISTew York Fire Insurance Exchange, and that I will not place 
any risk with those not members unless I cannot secure sufficient 
insurance on such risks from members of the Exchange, in which 
case I agree to file with the secretary of the Exchange, within one 
week of so placing, a list of such outside company or companies in 
which same has been placed, with the name of the assured, location 
of risk and the amount of insurance given them. 

About 7,500 brokers are at present certificated by the Exchange ; 
the fee for the certificate is $10. About five-sixths of 
the buildings in the territory of the Exchange are given minimum, 
that is, non-schedule, rates according to the nature of the occu- 
pancy; these in general are the so-called ^^ preferred risks." The 



32 [Assembly 

remaining 50,000' buildings, comprising mercantile, manufacturing 
and other general hazards, are rated specifically, or by " schedule;" 
that is, the rate is built up foT each building or stock by a detailed 
analysis of the hazard. The general subject of schedule rating 
will be treated in Part II of this report. 

An addition to the rate as otherwise determined may be made 
as a charge for local conditions, such for instance as bad streets or 
deficient jvater-supply, or an addition such as the " San Francisco 
Advance" made in 1906 in order that the companies might re- 
coup themselveis after the San FranciscO' conflagration. 

In Part II of this report the subjects of rating, commissions 
and brokers will be discussed in detail; this discussion will apply 
to the 'New York Fire Insurance Exchange; further observations 
on the subject of the Exchange will be found in Part III among 
the recommendations. 

The SuBUEBAi^ Fiee Insueajstce Exchange. 

The Suburban Fire Insurance Exchange is an unincorporated 
association of companies; its purpose is to control premium rates 
and commissions to agents and brokers. Its territory consists of 
Westchester county, Putnam county, Rockland county, Richmond 
county, the portion of the borough of the Bronx east of the Bronx 
river and all of Long Island outside the borough of Brooklyn. 

The Exchange was founded in 1907; prior to that, since 1900, 
there had been in this territory a period of open competition. The 
membership of the Exchange comprises about 140' companies ; not 
all the companies writing in this territory are members of the 
Exchange. 

The Suburban Exchange is modeled on the Isew York Fire In- 
surance Exchange. The two pledges required of brokers are the 
same that are required by the 'New York Exchange. The Sub- 
urban Exchange allows all local agents a 20 per cc'nt. commission ; 
brokers who have signed the first pledge are allowed 5 per cent, 
commission, and those who have signed both pledges are allowed 
10 per cent, commission. 

About 145,000 risks, estimated to represent about 75 per cent, 
of the premium income in suburban territory, are rated under a 
system of minimum classification which in effect is a very simple 



jSV 30.] S^ 

form of schedule rating. The remaining risks, ahout 5,000 in 
number, in general are rated by schedule. 

B 

The Underwriters' Association of I^Tew York State. 

The Underwriters' Association of New York State is an unin- 
corporated association of the special agents, or fieldmen, of fire in- 
surance companies ; its headquarters is Syracuse ; its territory con- 
sists of all the counties north of Putnam and Westchester, except- 
ing the cities of Buffalo and Tonawanda. The association has 124 
members representing eighty-four companies; it was founded in 
1884. 

The object of the association is the making and control of pre- 
mium rates, the promotion of co-operation among fieldmen and of 
good practices in the business. 

The local boards of underwriters, composed of local agents are 
under the supervision of the State Association. The local agents 
of the companies that are represented in the association are forced 
to belong to these local boards and in joining they agree to main- 
tain the association rates. Most of the agents' daily report sheets 
pass through the hands of the association's stamping-clerks who 
verify the correctness of the rate and see that the proper forms 
have been used. The association in this way is able to know 
whether or not the rates are being maintained. The same plan 
of local boards and stamping-clerks is followed by the Suburban 
I Association. 

I The rates of the State Association are largely made by schedule 
although dwellings are for the most part on a tariff of minimum 
rates. The State Association does not concern itself with the sub- 
ject of commissions. 

The Buffalo' Association of Fire Underwriters. 

The Buffalo Association of Fire Underwriters is an incorporated 
b^y composed of local agents of Buffalo and Tonawanda ; its pur- 
pj^ is to make and maintain rates and to improve local practices 
(in underwriting; it has about seventy members; most of the com- 
panies doing business in its territory are represented in the as- 
sociation. 



34 [Assembly 

The agents' daily report sheets are reviewed hj a, stamping- 
clerk, for the purpose of correcting errors in rates and forms and 
detecting whether the rate has been observed. An agent who doe^- 
not observe the tariff rate is disciplined. The rating is done 
largely by schedule. BrokerSi are certificated by the^ Buffalo Board 
and their rates of commissions are fixed. They are required to 
sign a pledge not to rebate and not to place risks with agents who 
are not members of the association or with brokers who do not 
hold certificates. 

The four organizations here named are the only rating bodies 
that operate in Kew York state. The important questions in the 
subject of rating and combination concern all four alike and will 
be discussed in Part II of this report. 

It will be observed that there are some companies which do not 
belong to the rating organizations. These are called non-Board 
companies. The same company however, may be a Board company 
in one part of the country and non-Board in another. In 'New 
Xork city only do the companies all belong to the Exchange. 

It is not necessary to name in detail the organizations which 
make rates in the rest of the country, as they are in general similar 
to those already described. In certain states, however, notably 
the so-called ^'anti-compact'^ states wherei organizations of the 
companies for making or maintaining rates have been prohibited 
by law, the rating is done by a " rater " who has no connection 
with the companies; he makes so-called " advisory '' rates and sells 
them to the companies. 

The Eastern- Ui^ioisr and Western- Union. 

It has been seen that the l^ew York Exchange and the ^Suburban . 
Exchange regulate commissions to agents. In general, however, 
commissions are regulated by associations of companies formed for 
this special purpose; the eastern part of the country, from Maine 
to Texas, is under the jurisdiction of the Eastern Union; a similar , 
organization called the Western Union has jurisdiction over^. ' • 
Middle West. These associations will be referred to again in Part 
II of this report. 



Ko. 30.] S6 

The Inteeiok Oeganization" of a Company. 

Tlie duties of the officers and directors of an insurance company 
are mucli the same as those of any other corporation. The terri- 
tory over which a company operates is so large that it is customary 
either to have several Departments with salaried managers or else 
to put the business in certain fields into the hands of general agents 
who are paid a commission. 

The person who comes into direct contact with the insured is 
the local agent. The local agent is paid a commission by the com- 
panies; usually a number of companies are represented by the 
same agent. Most companies employ in addition salaried men 
called special agents to look after their interests. A special class of 
persons called adjusters are employed by the companies to settle 
losses. 

The Work of an Insurance Office. 

When an application for a policy is received by an agent he 
should take steps to satisfy himself that the risk is a desirable one. 
He then writes the policy and sends a Daily Keport sheet to the 
company advising them of the details of the risks that he has writ- 
ten. If the compiany thinks the risk is undesirable the agent is 
directed to cancel the policy. The companies are aided in keeping 
track of their risks by very carefully prepared detailed maps. 
Frequently a company is unwilling to assume the whole risk and 
part of it is " reinsured '^ in another company ; for this purpose 
some of the companies have ^' treaties *' with foreign companies 
which do no direct business. A policy can be cancelled on the 
initiative of either party. 

In case of a small loss the adjustment is often made by the local 
agent or a special agent. If the loss is large a special adjuster is 
sent out. If several companies are involved on the same risk the 
adjustment is often made for all together through an adjustment 
bureau. 



» 



06 [Assembly 



PART II. 
AN ANALYSIS, BASED UPON EVIDENCE RECEIVED, OF THE PROB- 
LEMS OF FIRE INSURANCE. 

General Notions. 

In the concluding part of this report will be found the recom- 
mendations which your Committee is prepared to present. The 
testimony taken, however, shows that the subject of fire insurance 
is so technical, the problems are so far-reaching, that it has been 
thought necessary to preface these recommendations by a careful 
analysis of the questions involved. The present Part is devoted 
to this analysis; while, for the sake of simplicity, an informal 
style of treatment has been adopted, it should be understood that 
the discussion is based very strictly upon the testimony which has 
been developed before your Committee. 

As rating is the fundamental problem of fire insurance, other 
parts of the subject have been discussed, not in the order in which 
the testimony was developed, but so as best to suit the treatment 
of this particular question. 

There are a few general ideas which it seems to the Committee 
should be once for all stated before going on to the consideration 
of the more immediately practical problems of the business. 

Insurance is one of several methods for relieving misfortune. 
The simplest of these is that of voluntary contributions; but there 
are only a few steps from this to the most elaborate form of insur- 
ance. Even here the fundamental principle of insurance is pres- 
ent : the contribution of the many to help bear the misfortune of 
the few. 

The transition from benevolence to the simplest form of insur- 
ance comes when those who are exposed to a possible misfortune 
agree beforehand that they will contribute if the misfortune should 
occur. The fact that, when the agreement is made, it is not known 
who the unfortunate one will be brings this plan down to la basis 
of self-interest. It is this form of insurance which is found in 
assessment (life insurance) societies, and among the town and\ 
county co-operative (fire insurance) societies. 

A further step consists in collecting the premium in advance. 
This is a more significant step than is at first realized. The losses 
have not yet occurred, and may npver occur. On what basis then 



IsTo. 30.] 37 

can tlie charges be made ? Only on the basis of the law of general 
average, that is, that, in the long run and in the mass, even ap- 
parently fortuitous events do happen in an orderly and definite 
manner. 

But this makes it necessary that the number of those who enter 
such an agreement shall be large, that there may be a broad enough 
basis for an average. Furthermore, it necessitates a very careful 
determination of what the premium should be, and this can be only 
on the basis of a similar past experience. This step then has in- 
troduced the necessity for ^^ rating," that is for the determination 
of the so-called ^^ hazard." 

This is the form of insurance which is carried on in general by 
mutual companies. The mutual fire insurance companies protect 
themselves, however, against a possible insufficiency in the pre- 
miums by the right to assess. 

The next step consists in doing away with a mutual agreement 
and the substitution of a third party who, in the capacity of mid- 
dleman, collects the premiums and pays the losses. It is custom- 
ary, furthermore, for this third party to guarantee the payment of 
the losses so that the policy holders are thereby relieved of all 
possibility of future assessments. 

This final plan is the exact form of the so-called stock fire in- 
surance. The third party that collects the premiums and guaran- 
tees to pay the losses is a corporation created for this purpose and 
known as a stock fire insurance company. 

From this point of view the transaction may be viewed as a sale 
of a quasi-commodity, namely, indemnity in case of loss ; the grocer 
sells flour, the insurance company sells indemnity. For certain 
purposes this is a valid point of view, but it must not be allowed 
to obscure the fact that the business, even in this form, is essen- 
tially mutual. The business could not endure for a day if there 
were not this mass of the insured, even though held together only 
by economic forces, yet as truly standing behind the company as 
though they were still united by a mutual agreement. 
\ For immediately practical purposes and for legal purposes, the 
relation between insurer and insured may be thought of as simple 
and direct but in an inquiry such as the present, involving the 
public as a whole, and involving the future as well as the present, 
the important questions are economic rather than legal; or better, 



38 [Assembly 

sound laws can be founded only on a study of fundamental, econ- 
mic conditions, and for insurance . this can be attained only by 
constantly bearing in mind tbe essentially mutual character of the 
business. 

Insurance men refer to this fact when they speak of insurance 
as a tax, meaning by this only that to pay the fire losses of a com- 
munity it is necessary to collect all this money (and enough more 
to pay the expenses of the business) from the insured, and that 
the company acts only as collector and distributor. 

It seems almost unnecessary from this to draw the additional 
corollary that the company in the long run can pay out only what 
it collects; yet this is commonly lost sight of. Even among in- 
telligent people there is a feeling that when an insurance company 
pays a loss there is an end of it, and that, therefore, in some mys- 
terious way, it escapes being an economic loss to the public. 

The payment of premiums is forgotten in the payment of the 
loss. It is this failure to balance the many against the few, the 
public against the individual, the long view against the short view, 
that leads to so many popular fallacies ; but in such an inquiry as 
the present it is the public and the long view which must be given 
precedence. 

The contingency upon which the payment is made is a loss by 
the insured. There is no inherent reason, however, why this con- 
tingency should not be the misfortune of some one else; that is, 
A might take out a fire insurance policy upon the house of B. The 
effect of A's holding a policy upon his own house is to make him, 
to a certain extent, indifferent to threatened misfortune, but to 
hold a policy upon the house of B would make the burning of B's 
house something to be desired. 

To allow this would obviously be such bad public policy that 
such contracts as these are now impossible to sustain although in 
the early days of insurance they were common. The insured must 
now show an ^^ insurable interest " in the property. This pro- 
vision limits insurance strictly to the furnishing of indemnity. 

Rating. 
The difficult problems of the fire insurance business all center 
in one way or another about the subject of rates. This, is an im- 
portant matter in any business, but in fire insurance there are dif- 



1^0. 30.] 39 

ficulties and peculiarities that make it particularlj important. In 
a manufacturing business the price of an article is largely deter- 
minded by the cost of production and this can, in general, be defi- 
J^nitelj ascertained. In a mercantile business the selling price is de- 
termined by the buying price. In the case of public utilities the 
fixing of rates is more difficult ; more elements enter into the cost 
and more factors must be given consideration. 

In fire insurance companies in which the assessments are made 
after the losses the rating problem has no particular difficulty ; but 
in stock companies, where the premium is collected in advance, the 
anomalous condition arises that a price must be set to pay for some- 
thing that has not happened and may not happen at all. 

The price has therefore to be based upon the '' expectation '^ of 
loss or the '^ hazard " as it is called. What should be the rates for 
a planing-mill and for a fire-proof office building ? This is equiva- 
lent to saying, " what is the hazard of each," or in other scarcely 
more illuminating words, " What is the expectation of burning of 
each." ]^o-one would fail to be able to assert that this is greater 
for the planing-mill than for the office-building, yet the under- 
writers must go further than this and Rx a numerical value upon 
these hazards. 

Fortunately there is one guide in this matter, the past; other- 
wise the problem would be quite hopeless. If experience has shown 
that out of every thousand planing-mills there are the equivalent 
of twenty-five total losses and, if this planing-mill is deemed typi- 
cal of the thousand, a rate of $2.50 per $100 of insurance should 
prevail (this is without loading for expense) ; if the mill is deemed 
to be below the average of the mills upon which the experience is 
based, " underwriting judgment " must be invoked, in lieu of more 
precise knowledge, to decide how much larger the rate must be. 

This, very briefly, is a description of the process of making the 
rate in fire insurance, although in schedule rating, as we shall see, 
the process is far more detailed. 

When one considers the almost infinite complexity of the hazards 
■ at are present in buildings — faulty construction of all sorts, ex- 
cessive heights, large floor areas, openings between floors, dan- 
gerous processes, inflammable material, materials susceptible to 
damage" — one can form some comprehension of the difficulties of 
rating. 



40 [Assembly 

Tlieoreticallj the rate measures the destruction that would occur 
in some thousaaids of just such huildings under just such condi- 
tions; practically, what the underwriter has to work on is what 
has happened to buildings that in certain respects resembled th^ 
one, and the problem of rating is the adaptation of this experience 
to the particular risk in hand. 

To this already difficult problem must be added however two 
other features; first, new hazards are arising daily upon which 
no experience has been accumulated, which, nevertheless, must be 
considered in making the rate, and second, new processes and new 
forms of construction are being ,so rapidly developed that the ex- 
perience upon a class becomes to a degree obsolete before time has 
elapsed in which to collect a large enough experience to give an 
average. 

A further difficulty may here be referred to, the fact that in 
large cities there is a conflagration hazard of an entirely indeter- 
minate size, that is, conflagrations come too infrequently to allow 
for the working of the law of averages. 

As an example of the first point may be taken fire^proof hotels ; 
there is not adequate experience in this class on which to base 
rates ; another example is the hazard of acetylene gas ; this illum- 
inant came into use very rapidly and its hazard was almost un- 
known. 

As an example of the second point may be taken electric power 
stations; the defects of the early installations have been so thor- 
oughly overcome that the experience of ten years ago would be mis- 
leading. 

Granted that the problem of rating is very difficult; the practical 
result is that it is impossible to make rates properly on the basis 
of a single company's experience. The experience even of the 
largest companies is not extensive enough to insure the proper 
working of the law of averages on all classes. It is very natural 
then, and from this point of view desirable, that the companies 
should, for this purpose, combine ; for not only can they thus make 
rates more effectively but, since rates on the same classes are neeqj 
by all, it would be a useless expense to have the work duplicated. 'So 
far therefore as the making of rates goes, it is desirable that the 
companies should combine ; but in actual practice the combinations 
of the companies are not only to make rates but to maintain them, 






Ko. SO.] 41 

and the desirability of this is another question which will be dis- 
cussed later. 

Opeis" Competition^. 

We have now to consider the effect of open competition in fire 
insurance. It is not necessary to theorize about this for there is 
plenty of evidence in the rate wars which were formerly carried 
on and which to some degree still prevail. The universal effect of 
such periods of open competition wherever and whenever they have 
occurred has been a cutting of rates to a point that was below the 
actual cost of the indemnity. If the rate war had been general 
this would have meant the ultimate death of the company, and rate 
wars of even a local character lead, if long continued, to the disso- 
lution of the smaller and weaker companies. The effect on all com- 
panies is weakening. The policy-holder, to be sure, gets his in- 
surance vei'y cheaply ; too cheaply,- for the weakening of the com- 
panies is not in the long run and on the whole an economic good, 
for there J.S just so much less protection behind the insured in case 
of a conflagration. The mutual character of insurance is so strong 
that nothing which tends to produce inferior protection can be for 
the public good. It has not done the policy-holder any good to get 
cheap insurance if, when the test comes, the protection is lound 
to be worthless. 

But this is not all. In a state of open competition the rates 
adjust themselves not to the hazards but largely to the strength 
of the insured so that the man of influence, whose patronage is 
desired, will get his insurance too cheaply, as against the small 
man who is not in a position to drive a sharp bargain. That is, 
competition results in discrimination. 

Rate wars in fire insurance are very fierce; the motive is the 
same as in any rate war, namely, to secure business even at a loss 
in the hope that when normal rates again prevail the patronage so 
won will remain and the loss will be made good. 

To summarize the case : the effect of a period of sustained 
open competition is the procuring by the public temporarily of 
cheaper insurance; this advantage mostly falls to persons of in- 
fluence; the quality of the protection is lowered since the com- 
panies are weakened. Furthermore, if the process continues long 



4:2 [Assembly 

enough some of the smaller companies will be forced to retire and 
their business will -be absorbed by the large companies. 

Eiate wars terminate when the companies realize that self-preser- £' 
vation requires them to obtain adequate rates and ordinarily this '"^''' 
can be done only by some form of agreement. 

The question occurs to one whether there cannot be open compe- 
tition that does not go to an extreme, such competition as there is 
iUj for instance, the grocery business or the shoe business. The 
distinction seems to be t^his : the grocer has very clearly in mind 
what his goods have cost him and what price he must get for them 
if he is to escape a loss, and he will not, except in an extremity, 
sell at a loss. The underwriter, on the other hand, is selling 
indemnity against something that may never occur, so, however 
low his price, there is always some possibility that he will escape 
without a loss; lat any rate he can gamble on the chance. What 
corresponds to the point below which the grocer dare not go with- 
out a loss is the average loss experience on the class to which the 
risk belongs. But this is not easily ascertained; at any rate it 
does not staire the underwriter in the face in the same way that 
the buying price of sugar confronts the grocer. 

Another reason why open competition goes further in hre insur- 
ance than in other lines is possibly due to the fact that the corpora- 
tive form of organization encourages the officers to use methods 
which perhapsi they would not use if the business were entirely 
their own. 

'Combination. 

At any rate, however you may account for it, the actual histor- 
ical fact is that at all times and in all places a state of open com- 
petition has been found impracticable and that combinations of 
the companies have been formed not merely to make but to main- 
tain rates. 

'Ncfw when a man comes to buy insurance and finds the com- 
panies combined on the matter of rates, he is likely to feel shocked, 
particularly in this day when all combinations of capital are j 
looked at with suspicion. He finds that it is impossible to get insur- 
ance, at any rate of the grade that he desires, without paying a 
price that has been definitely agreed upon by the companies. He 
has no chance to hargain ; the price is made and unless he goes to 



ISTo. 30.] 43 

the trouble of linnting up compauies that are not in the combina- 
tion, he must either take the insurance at that price or leave it. It 
is natural for him to conclude that this combination exists in 
restraint of trade and should be broken up. 

A^Ti-CoMPACT Laws. 

And this is exactly what was done by a number of states at 
about the time that the formation of " trusts " began to appear as 
a menace to the country. So-called anti-compact laws were passed 
which made it illegal for the companies to combine either to make 
or to maintain rates. That is, these combinations were recognized 
to be trusts and it was a simple matter, apparently, to break the 
combination. 

As a matter of fact, however, the economic forces involved were 
too strong to be restrained by law. ]N"othing could overcome the 
fact that a condition of open competition in which there were no 
standard rates was an impossible condition for doing business. 
The result, therefore, was that there came to be in every one of the 
anti-compact states a '^ 'State rater " who made and promulgated 
the rates in essentially the same w,ay that they were made before 
by the rate-making bodies of the companies. 

These " advisory '' rates so made were sold to the companies and 
were observed or not as the companies saw fit. So clearly, how- 
ever, was the importance of avoiding general demoralization rec- 
ognized that in general the rates were observed by the leading 
companies. So the net result in the " anti-compact " states has 
been that the rates, instead of being made by the companies, were 
made by a '' rater'' and sold to the companies; the rates in general 
were observed as before but as there was no agreement to main- 
tain rates it did become possible to a certain extent to bargain over 
the price. 

The result has been that in general people paid established rates 
for their insurance but that, where a man had enough influence," 
he eould, if he cared to, obtain concessions in rate. That is, at 
least one result of anti-compact laws has been an increased dis- 
•crimination against the average policy-holder and in favor of the 
rich and influential. 



44 [Assembly 

As to the rates before and after tiie passage of the anti-compact 
laws the testimony seems to be that the rates have not been lowered 
bj the passage of such laws. Figures from Missouri show that there 
the rate did not follow the burning-ratio so closely after the pas- 
sage of the law as before. This is explained in the following way : 
before the passage of the law the rates were largely made by 
boards of local agents who were interested, for the sake of their cus- 
tomers, in keeping the rates low. The state raters, however, hav- 
ing no contact with the insured, did not feel this influence and 
the tendency was for the rates to increase. 

The actual working of anti-compact laws has not been satisfac- 
tory ; they have not decreased rates and they have greatly increased 
discrimination ; they have taken the rate-making out of the hands 
of the companies, who were in direct contact with the business, 
and put it in the hands of persons who had no way of testing by 
experience the rates which they made, and who furthermore did 
not stand in such relation to policy-holders as to feel the force of 
public opinion. 

It is well recognized that in general anti-compact laws have 
been a failure and there is noticeable a distinct reaction against 
them. This is observable in the agitation for their repeal, as in 
Missouri where a bill repealing the law was passed at the last 
session of the Legislature but vetoed by the Governor; this is also 
noticeable in the rising agitation for some kind of control of rates 
by the State, a control that would even perhaps go so far as. to place 
the making of rates with the State. Three states, all of them 
so-called '' anti-compact '' states, Kansas, Texas and Louisiana 
have gone to various lengths in this matter as will presently be 
explained. 

- There is another adverse effect of anti-compact; to explain this 
it will be necessary to develop in some detail a refinement of 
modern fire insurance rating whose importance and influence can 
hardly yet be fully estimated; this is the subject of schedule 
rating. 

Schedule Eating. 

This method of rating proceeds upon the theory that the hazard 
of a risk may be analyzed into its component parts and that the 
rate for the risk as a whole may be built up from its various 



'No, 30.] 45 

elements. For example, let us suppose the proper rate for a cer- 
tain type of building is known, we will say a five story, brick mer- 
cantile building, of 5,000' square feet of floor space on each floor, 
with closed elevator shafts and with certain other definite details 
of construction. ]N'ow it will be generally conceded, at any rate 
it can be demonstrated by experience, that additional stories, a 
greater floor space and open elevator shafts are all factors that 
tend to increase the fire hazard. The theory of schedule rating is 
that the quantitive effect of each of these factories in increasing the 
fire hazard can be separately given and that the resultant rate may 
be so built up. While there is a field here for a critical analysis of 
just how this combination shall be effected the reasonableness of 
the general proposition must be readily admitted. 

The most common method for uniting these factors into one 
rate is by simple addition; this is the method that is generally 
used in ISTew York city and wherever in this state rates are made 
by schedule, for instance : let us suppose that the rate of the five- 
story building first described to be 50 cents ; let us suppose now 
that the hazard of three additional stories may be measured at 
32 cents, that the hazard of each additional 1,000 feet of floor area 
may be measured at 3 cents, that the hazard of open elevator shafts 
may be measured at 6 cents, and furthermore, that the presence 
of fire extinguishers, which we will suppose are not in the build- 
ing we have used as a type, serve to decrease the hazard to the 
extent of 5 cents. Then the rate for an eight-story brick building, 
of -7,000 feet ground-area, with open elevator shafts but equipped 
with fire extinguishers, in other respects, however, being like the 
type building already referred to, is obtained as follows : 

Cents. 

Kate of type building. . 50 

Increase of hazard by 3 extra stories 32 

Increase of hazard by 2,000 feet extra ground-area. . . : . . 6 

Increase of hazard by open elevator shafts 6 

94 
. Reduction of hazard because of fire extinguishers 5 

Final rate of building 89 



46 [Assembly 

The actual practice of schedule rating by, for instance, the 'New 
York Fire Insurance Exchange differs from this only in degree. 
A base rate for a certain standard building is taken, the standard 
involving conditions regarding location and fire protection as well 
as construction and to this are added charges for deficiencies with 
regard to various elements of construction, equipment, occupancy 
and exposure, and from the result are taken whatever allowances 
are to be made for conditions that are more favorable than the 
standard upon which the base rate is predicated. 

The schedule which applies this method most carefully is the ao- 
called Universal Mercantile Schedule originated by a committee of 
the underwriters of which Mr. F. C. Moore was chairman; it is 
often known as the " Moore " schedule ; this forms the basis for all 
the schedules in use in this state, and in fact in a large part of the 
United States. 

Th'e technical detail in a schedule lies first in the nature of the 
ground work, or plan, and, second, in the determination of the exact 
numerical charges to be made for the different elements of the 
hazard. 

Another schedule of a somewhat different type is in use now in a 
large number of states in the Middle West and South. This was 
originated by Mr. A. F. Dean, and i& known as the '' Dean " or 
" Analytical " schedule. Its essential feature consists in the fact 
that the charges instead of being flart are a percentage of the base 
rate. This, to a degree, expresses the fact that there is a relation- 
ship among the hazards, for instance, that a stove is a greater haz- 
ard in a building of poor construction than in a building of good 
construction. The good points of this schedule are, however, quite 
as much of a practical as of a theoretical character, namely, as the 
charges are all percentages of the base rate, if the resulting rate 
should turn out in the light of experience to be too high or too low 
it could be accordingly lowered or raised simply by lowering or 
raising, the base rate. 

It will be readily realized that the exact nature of the details of 
either the plan or charges in a schedule is a highly technical matter 
which need come in no' way under the surveillance of this Com- 
mittee. It is sufficient for the purpose of the present inquiry that' 
the companies are using methods for the determination of rates 



-No. 30.] 47 

whicli require a detailed analysis of the hazard and that each ele- 
ment of the :so analyzed hazard- has a definite contributory effect 
to the final rate. 

The economic^ even the sociological, effect of the application of 
schedule rating can scarcely be overstated. It is doubtless true that 
schedule rating is at present by far the most powerful agent in the 
inauguration of good building construction and in checking the ap- 
palling fire waste of the country. 

The power of schedule rating as an economic force can be very 
simply explained ; it lies in the fact that it is specific and open, 
that is to say the rate, instead of being made as a single lump sum, 
is in direct relation to the various features of the hazard. The im- 
portance of this lies in the fact that when the insured sees just how, 
by making certain changes in his building, he can obtain a more 
iavorable rate, there is a direct appeal to his pocket which is at 
once taken advantage of. The change may consist simply of clear- 
ing rubbish out of the basement, or closing an opening, or it may 
be the inclosing of the elevator shafts or the equipment of the build- 
ing with automatic sprinklers. In any case the insured has before 
him the exact details of how his rate is made up and can see just 
how much his rate can be reduced by making improvements. Usu- 
ally the reduction in rate is so great as compared with the cost of 
improving the conditions that the changes are at once made. Even 
the expense, which is considerable, of installing automatic sprink- 
lers is not in general greater than the saving on from two to five 
years' premiums. 

^ot only does the application of schedule rating operate to im- 
prove already existing risks, but it leads in a similar way to greatly 
improved construction in new buildings. Most new buildings of 
any importance that are being built nowadays are planned with 
full consideration of the reductions in rate which various features 
of construction will command. It is not too much to say that to 
schedule rating is due, as much as to any other one cause, the credit 
for improvements in modern construction. 

After a schedule has been formed, which, it may easily be under- 
stood, is a matter of great difficulty and delicacy if it is to be gen- 
erally useful, the application of the schedule is to a degree a me- 
chanical process. In practice, when a risk is to be rated under a 



48 [Assembly 

schedule, an inspector is sent to- the risk who makes a survey of it, 
noting in what respects and to what degree it falls short of the 
standard, noting also any features that are above the standard; he 
makes in fact a complete and impartial record of the risk in so far 
as its features have a bearing upon the fire hazard. It then be- 
comes a matter of routine office work to apply the schedule to the 
elements of the risk as described in the survey. 

When allowances are made for the slight differences in point of 
view between different inspectors, the rate for a given risk, when a 
schedule has once been established, is perfectly definite. 

It is this fact that gives schedule rating one of its chief values, 
the fact that it eliminates discrimination — not completely, for in 
case the schedule is wrong one class will suffer at the expense of 
another — but at any rate the discrimination is all centered in the 
schedule itself. It certainly eliminates discrimination on the basis 
of ^^ influence '' which is the most vicious form of discrimination. 
And, even though the schedule is not perfect, it does what is most 
important, it adjusts the rates approximately correctly inside of 
given classes. 

That is, a schedule may err in making wood-working establish- 
ments pay too high a rate as compared with metal-working estab- 
lishments, but it is more important to have the rates for different 
wood workers properly adjusted among each other than the rate as 
between wood workers and iron workers. The reason for this is 
that the wood workers and iron workers are in direct competition 
each among his own group, but there is no particular competition 
of wood workers with iron workers. 
• Any reasonable schedule, even though it may have considerable 
defects, will tend to produce equity inside of fairly homogeneous 
classes. 

The Influence of Schedule Hating upon Fire Prevention. 

The operation of schedule rating in bettering fire prevention is 
one of those powerful unconscious agencies like the betterment of 
the race through natural selection. For the operation of natural 
selection there must be a correlation between the quality in ques- 
tion and the increased tendency of the individual to survive ; for 
schedule rating to better conditions there must be not only a 



:^o, 30.] 49 --, v^-^^"- - 

definite relation between a better condition and the insurance rate, 
but this relation must be capable of being brought forcibly to the 
attention of the insured. In this process there is still another 
agency acting and another force. The agency is the broker or the 
local agent and the force is competition. 

That broker or local agent can best secure business who can, 
other things being equal, perform the greatest service. Among 
the services that a broker or local agent does in this very way per- 
form is the service of bringing to the attention of a client the 
reduction in rate that he can secure by making changes in his 
old building, or in planning his new building, so as to conform to 
the standards of the schedule. And if he should fail in assiduity 
in keeping his client thus informed, he would find that another 
broker or another agent had slipped in and performed this service 
and that his client's business had been transferred to the one who 
had thus demonstrated a greater capacity for looking after the in- 
terests of the insured. 

The mechanism is thus complete: first, a rate which is made 
specifically to depend upon the various elements of the particular 
hazard, second, the power of the insured to ascertain all these facts 
as to his rate, third, the fact that the matter is brought vigorously 
and definitely to his attention by either broker or local agent, and 
it might be added, fourth, that, in case changes have been made 
the so-modified conditions will be given credit at once in the rate. 

It is not to our credit that schedule rating is the most powerful 
agency for fire prevention, for it acts entirely through the selfish 
desire of the insured to lower his insurance rate, not primarily be- 
cause he is interested in reducing the fire loss. But the insured 
will be only partly compensated by his insurance in case he suffer? 
a loss. There will be an interruption of his business and a gen- 
erally chaotic condition from which he is 'bound to suffer ; he 
should have an interest in fire prevention on this account. To be 
driven to an interest in fire prevention only indirectly because of 
its effect upon his premiums is not praiseworthy when there are 
direct ways toward the same end, the enactment for instance of 
proper building laws, the creation of offices for inspecting risks 
and for a general surveillance over conditions looking toward 
fire prevention, not to speak of greater individual carefulness. 



6'0i [Assembly 

While, however^ we are waiting for tlie time when we shall 
be farsighted and intelligent enough to attack this problem di- 
rectly, we must recognize that we have, in the operation of 
schedule rating, an immensely important and effective instrument 
for this purpose; that largely unconsciously, or at least without 
direct intention, the insurance companies through their develop- 
ment of schedule rating are facilitating this work. In a considera- 
tion therefore of insurance legislation there must be kept in mind, 
among other things, the effect of any proposed law upon the opera- 
tion of this process. 

Anti-Compact Laws and Fike Prevention. 

Anti-compact laws (and this brings us back to the point of de- 
parture) have a tendency to break down the force of this bene- 
ficial action. For, while in anti-compact states the rating is 
usually done by schedule, there is no longer such a clear-cut rela- 
tion between the hazard and the rate ; the " rates '' are now " esti- 
mates " and while, as a matter of fact, they are generally adhered 
to, there is just enough dissociation of the rate-making and the 
rate-getting decidedly to weaken the good effects of the system of 
schedule rating upon fire prevention. 

Open Competition and Fire Prevention. 

The beneficial effects of schedule rating have been demonstrated 
by the rise in the burning ratio which follows a period of de- 
moralization in rates. During a rate war schedule rating is of 
course abandoned. It then follows that untidy conditions or the 
absence of a watchman will not be penalized through the rate, and 
so rubbish is allowed to accumulate, the watchman is taken off, 
and there is a general lowering of tone which manifests itself in 
an increased burning ratio. 

Anti-Compact Laws and State Pegulation. 

Three states which have had anti-compact laws, becoming dis- 
satisfied with the results, particularly because of the discrimina- 
tion which anti-compact laws had produced and fostered, have 
recently entered upon a system of State regulation of fire in- 
surance rates. 



* 



ISTo. 30.] 51 

In Kansas, under the anti-compact law, a very aggravated con- 
dition of rate demoralization existed, v^ith accompanying dis- 
crimination. There was general dissatisfaction both on the part 
of the people, because of gross discrimination, and on the part of 
the companies, because they were making no money. A law was 
passed which required the companies to file schedules of rates 
which they could not depart from, and, at the same time, rebating 
was prohibited. Power was given to the iSuperintendent of In- 
surance to order changes in the rates if in his opinion they were 
not equitable. The constitutionality of the law is being tested in 
the courts. In operation the law has not been unsatisfactory. 
The Superintendent has made one general reduction of 10 per 
cent. 

In Texas, the Legislature, in several special sessions, has been 
struggling with the problem of rates; the conditions there are 
very much involved, and very unsatisfactory. There has not been' 
time to see whether the new State-rating law will improve the 
situation. 

The Louisiana law provides a State board with power to review 
rates and to order changes if necessary. 

l^one of these laws has been in effect long enough to show what 
the practical result of State regulation of rates will be. 

It is interesting to observe, however, how entirely the principle 
of State regulation is opposed to the principle of anti-compact. 
Under anti-compact, a premeditated and enforced uniformity of 
rates was prohibited while under State regulation the effect, 
either by statute or in actual practice, is to secure absolute uni- 
formity. The anti-compact laws in effect made it possible to 
^^ bargain'' and the result was gross discrimination; under State 
regulation bargaining and discrimination are impossible. 

Objections to State Regulation. 

Some very grave objections can be made on theoretical grounds 
to the principle of State regulation of rates. In the first place 
if there is to be regulation at all the power must be delegated to 
some one outside the companies either to make, or in the last 
analysis, to order changes in rates. This is a very dangerous 
power; it is conceivable that it might be used for political pur- 
. poses, at any rate he who exercised the power would have effective 



52i [Assembly 

pressure brought to bear upon him from only one direction, that is, 
to reduce the rates, while at least in certain emergencies the situa- 
tion might demand an increase. 

The only just basis for making rates is either the experience G, 
of those trained in the business or accessibility to a large collated 
loss experience or better, of course, both. But there are at 
present no statistics of loss outside of the offices of the companies ; 
and, even if there were, the application of them properly is such 
a technical matter as to require the services of experts. To make 
or revise rates properly then the State would have to collect a loss 
experience, presumably by calling upon the companies for it, and 
it would have to employ experts at least as capable as those now 
employed by the companies. 

The actual possibility of doing this is, of course, not questioned ; 
the point is that the situation must be very aggravated that would 
warrant the State in assuming such an extended and technical 
piece of work. 

Certainly the persons who, by training and by closeness to the 
problem, are best able to handle this matter are those in the busi- 
ness, and this function should be taken away from them only after 
making perfectly sure that it cannot otherwise be kept free from 
abuse, in fact further than that, only after making sure that it 
can be better administered by the State. 

It has been suggested that this matter might be regulated by a 
board or court of review to which the companies might be cited 
by complainants to show cause why the rate should not be changed. 
It would not be absolutely necessary for this court to possess 
technical knowledge; many technical matters are decided by our 
courts of justice to-day, merely on the presentation of evidence. 
Such a plan might be feasible; the question is, however, whether it 
is necessary or desirable. 

One very great practical difficulty in State rating remains to be 
explained. Insurance is based on general average ; no one locality 
is sufficient for this, not even a state, not even the United States in 
the case of large conflagrations. If rate making were lodged with ' 
the State, and the experience of that state had been favorable, the '~ 
tendency would be to make rates purely upon this experience. 



:^o. 30.] 53 

The most serious effect of this wo aid be that, in case of a large 
conflagration, it would be impossible for a company to recoup 
itself, for each state in standing upon its own experience would 
refuse to contribute to an outside loss ; the result would be that the 
state in which the conflagration occurred would have to pay the 
entire loss. This would, of course, break down the very first prin- 
ciple of insurance, for one state is insuflicient to stand the shock of 
a large conflagration. The San Francisco fire strained the re- 
sources of the whole country and if it had been borne entirely 
by 'California, that is, if the companies had been restricted to 
California in recouping themselves, the blow would have been 
crushing. 

This is not an entirely imaginary situation. There happens to 
be an actual example at hand. Wisconsin is an anti-compact 
state to the extent of prohibiting combinations of companies but 
it permits the making of rates by local agents. This plan has in 
general given satisfaction to both companies and insured. 

After the San Francisco fire there was a general increase in 
rates throughout most of the country. But in Wisconsin when 
the companies tried to make an advance it was resisted by th© 
local agents (the local agents are, of course, much more influenced 
by popular feeling than the companies), and the result was that 
Wisconsin escaped paying its share toward putting the companies 
into a position to meet another such disaster. 

It is evident that rating should not be placed in the hands of 
those whose interests are more restricted than the territory over 
which it is necessary to operate to secure an average. In the case 
of the conflagration hazard this territory must certainly take in at 
least the whole of the United iStates. 

While 'State regulation stands always in the background as the 
theoretical solution of the problem of rating in fire insurance, as 
it does, indeed, for many other problems, it certainly should be 
invoked only as a last resort. 

Complaints by the Insured. 

When one begins to search for the state of affairs in fire insur-. 
ance, which would warrant this extreme measure, he is surprised 



54 [Assembly 

to find tliat it does not seem to exist. This Committee when it 
began its work sent out over six hundred letters to all the com- 
mercial organizations in this state inviting complaints on the sub- 
ject of fire insurance. It was furthermore requested that the 
letter be published in local papers, and, as a matter of fact, it 
was given a large additional circulation in tradcrpapers ; it was 
sent out by the Bar Association of 'New York city to each of its 
members, and it was given special notice in the publications of the 
ISTational Association of Credit Men, who had already interested 
themselves in the subject of fire insurance. There were not over 
a dozen complaints which were received in reply. iSome other 
complaints were received during the progress of the investigation. 

Altogether about thirty persons appeared before the Committee 
to make formal complaints and nobody who desired to make com- 
plaints before the Committee was refused permission. 

Most of the complaints were either with regard to arbitrary in- 
creases in rates or from brokers who had been refused certificates 
by the Exchange. The individual cases, in which arbitrary in- 
creases of rates were complained of, were referred to the managers 
of the rating organizations concerned. In most of these cases the 
increase in rate was found to mark the transition from a period of 
loose rating to one of exact schedule rating^ and the reasons given 
for the great advance were that the old rate was grossly inade- 
quate. Most of the complaints in suburban territory were with 
regard to the increase in rates that had been made when the 
Suburban Exchange was founded. Evidence was brought for- 
. ward by the companies to show that they had been losing money 
in the suburban territory before the formation of the Exchange 
and that the rates established were no higher than on other risks 
in other parts of the country. 

In the absence of any exact figures, the Committee was not able 
to judge whether or not the final rates were just, but the rates on 
these risks were shown not to be discriminatory. 

Over against these complaints there was considerable testimony, 
particularly on the part of large insurers that the rating in this 
•state was being done in an acceptable manner, and a very great ap- 
preciation of the economic value of schedule rating. In fact, a pe- 



'No. 30.] 55 

tition was received by the Committee^ signed by forty-five leading 
buyers of insurance, commending the principle of schedule rating 
and opposing unbridled competition. . . 

The Eaenings of Fieb Insueance Companies. 

In trying to discover the sources of the hostility on the part of 
the public tov^ards fire insurance companies, it becomes of great 
importance to examine the question of earnings. It has been 
claimed by insurance companies that the earnings have been small, 
for instance, that the " underwriting profit " has been nothing dur- 
ing the last forty years. There was evidently so little real ingenu- 
ousness in this statement, not that it was wrong, but simply that it 
was unenlightening, that the public set it down as not worth con- 
sideration, and continued to believe that fire insurance was very 
profitable. In order to have some definite figures to present, the 
Committee requested Mr. J. H. Woodward, head of the Auditing 
Bureau of the New York Department of Insurance, to have an 
inquiry made on this subject. Before these figures are referred to, 
it will be necessary to explain in detail on what basis they were 
made. 

What is left of the premiums received during the year, after 
losses and expenses have been paid, is what is commonly called 
^^ underwriting profit." If money earned no interest this would be 
tire whole profit, but, in reality, interest is almost as important an 
element in the profit of an insurance company as it is in the case 
of a bank, in fact, the unearned premium reserve is on deposit with 
an insurance company in very much the same way that the money 
of depositors is on deposit in a bank. 

Let us take an example : " suppose a company with a capital of 
$1,000,000, a surplus at the beginning of the year of $4,500,000 
and doing a business during the year of $6,250,000 in premiums ; 
suppose the unearned premium reserve at the beginning of the year 
is $5,800,000, suppose the losses during the year have been $3,- 
450,000 and the expenses $2,400,000. Then the underwriting 
profit during the year has been $6,250',000 less $3,450,000.1ess $2,- 
40'0,000, or $400,000, or expressed as a percentage, 6.4 per cent. 
upon the premium receipts, or 40 per cent, upon the capital. 

* This is a fairly typical example. 



^6 [AsSEMfitt* 

Kow the funds that the company has had at interest during the 
year are iapproximately the capital, $1,000,000, the surplus, $4,- 
500,000 and the reserve,* $5,80-0,000, altogether $11,300,000'. If 
this sum has earned 4 per cent, net the earnings from interest will 
be $452,000 or 45 per cent, upon the capital. The investment earn- 
ings of the company in this case are therefore somewhat greater 
than the so-called " underwriting '' earnings and if in an unfavor- 
able year the premium receipts were wholly used up in paying losses 
and expenses the company would still make a profit of 45 per cent, 
upon its capital stock from interest alone. 

The principle stated in words is as follows : besides the capital 
stock the company holds a surplus and an unearned premium fund ; 
even a low rate of interest upon this sum of money will yield a 
large return upon the capital. 

The point that has been brought out here is that the so-called 
" underwriting profit '^ is only a part of the profit of an insurance 
company, and that the companies in professing to take the public 
into their confidence and not making this point clear may rightly be 
criticised. 

In passing we cannot help noticing that the earnings were 85 
per cent, of the capital stock; superficially, at least, this seems an 
excessive profit and would seem to justify the popular impression 
that fire insurance is a bonanza. 

This illusion largely disappears when we consider carefully upon 
what basis the earnings should be figured. In reality, the amount 
of the capital of a fire insurance company has very little signifi- 
cance; it is scarcely anything beyond a basis for computing the 
ownership of the company. The real capital, in the economic sense, 
that the stockholders have in the business is to be valued either as 
what the business would bring if sold as a going concern, or as 
what; it would bring if liquidated. The former, the market price, 
would in general be greater than the latter by the value of the good 
will of the business. The sum for which the business could be 
liquidated, which we may call the proprietorship or the " propri- 
etary interest '^ would be, in general, the capital, the surplus, and 



* It would be more proper to use the average surplus and reserve, but the 
effect in this connection would be simply to make a slight change in the 
effective interest rate. 



No. 30.] 57 

say 30 per cent, of the reinisurance reserve (for the reason that the 
business could be reinsured for about YO per cent, of the reserve ; 
the reinsurance company v^ould be to no expense in procuring the 
business, and, hence, could afford to take it at less than the full pre- 
mium rate). In the example given above this would be $1,000,000 
plus $4,500,000 plus $1,740,000, or $7,240,000. This is the sum 
of money which, at the lowest estimate, the stockholders have, in- 
vested in the business. If the profits of the year, $852,000, are 
figured on this amount as a basis, the rate of income is 11.7 per 
cent, instead of 85 per cent, as when figured on the capital stock. 

ISTow this method of figuring profitis is the method that is used in 
every other kind of business, and there is no reason why it should 
not be equally valuable in fire insurance. It certainly answers the 
question which the prospective buyer of fire insurance stock wishes 
to have answered, namely, " how much, taking into account all 
sources of income, underwriting profit, interest and gain from sale 
of securities, will my investment yield." It certainly answers the 
question which the public is interested in : " what, taking every- 
thing into account, has the fire insurance business yielded ? Have 
the profits been excessive ? if so the premiums must have been too 
high.'' 

The actual method used was even somewhat simpler than this. 
Let us suppose a mercantile business, which on the basis of an in- 
ventory shows that the proprietors have $100,000, net, invested in 
the business at the beginning of the year ; this may be called the 
proprietorship or proprietary interest; let us suppose that at 
the end of the year a similar statement . shows that, without 
any further contribution by the proprietors, the business 
has increased to $105,000, and that the proprietors have in 
addition taken out $5,000 in profits. 'Then the earnings of the 
business have been the $5,000 of profits plus the difference between 
the values of the proprietary interest at the beginning and at the 
end of the year, that is, $10,000 altogether, and the earning rate 
of the business is the ratio of this to the $100,000 which was in 
the business at the beginning of the year, or 10 per cent. 

In the case of the insurance company • the proprietary interest 



68 .[Assembly 

lias already been defined as the capital^ surplus and 30 per cent, 
of tlie reserve. The difference between the values of this at the 
beginning and end of the year, plus the dividends to stockholders 
less any possible assessments form the earnings for the year and 
the ratio of this to the proprietary interest at the beginning of the 
year gives the earning rate. 

In our case we may suppose the figures to be as follows : 

Capital (end of the year) $1,000,000 

Surplus (end of the year) 4,850,000 

30 per cent, of reserve (end of the year) 1,860,000 

Proprietary interest (end of year) $7,710,000 

Proprietary interest (beginning of year) ,. . 7,240,000 

Gain in proprietary interest $470,000 

Dividends to stockholders 382,000 

Earnings (as before) $852,000 

$86^000 

Earning rate (as before) — 11 . 7/^ 

$7,240,000 

The result can be expressed in a slightly different way, thus: 
the money which the stockholders have, invested in the business, 
has yielded 11.7 per cent. ; of this it has earned 4 per cent, directly 
as interest; since the* entire amount has been invested in interest- 
bearing securities; the remainder 7.7 per cent, represents the 
profit which has come in consideration of the peculiarly hazardous 
nature of the business, that is, the stockholders have earned 7.7 
per cent, upon their money by leaving it at risk in addition to 
what they could have earned if they had kept it invested in safe 
securities. The figures used are, of course, purely in the way of 
illustration and in themselves have no significance. 



'No, 30.] 59 

The figures tliat were prepared bj the Insurance Department 
were made on this basis. The following groups of companies 
were selected: 

I. The six largest United States companies. 

II. The six medium United iStates companies (with assets 
about half-way between the assets of the largest and the smallest 
companies). 

III. The six smallest United 'States companies. 

IV. 'Six new United States companies between five and ten 
years old. 

V. iSix foreign companies. 

The first four groups were practically self-determined; in the 
last group were taken four typical English companies and two 
'Continental companies. 

The investigation was made for each of the last twenty years or 
failing that for the lifetime of the company. 

In the first group, that of the six largest United States com- 
paniesj it was found that the^ average rate of earnings for twenty 
years had been 10.9 per cent., 12.8 per cent., 10 per cent, 9.3 per 
cent., 10.1 per cent and 7.6 per cent., or an average for all six 
companies of 10.1 per cent. The fluctuations from year to year 
had been violent, ranging from a profit for one company in 1908 
of 31.4 per cent, to a loss for another company in 1906 of 49.4 per 
cent. 

The rate of dividends returned, computed on the same basis, 
and for these same companies in the same order were 4.6 per cent, 
4.1 per cent., 4.3 per cent., 7.3 per cent., 4.9 per cen>t. and 6 per 
cent, with an average for all six companies of 5.4 per cent 

That is, in words, for the last twenty years the six largest 
United States companies have earned on the average 10.1 per 
cent, per year on the amount of money that they have had, invested 
in the business; they have during that time on the average paid 
on the same basis dividends of 5.4 per cent., that is, of their earn- 
ings they have distributed in dividends a little more than half, 
keeping the remainder in the business where it has gone mostly to 



60 [Assembly 

increase the surplus and is tlius of course at the hazard of a con- 
flagration. 

The detailed figures for these six companies are as follows : f 

Earning Rates of the Six Largest 
Companies. 

Year. 

1890 

1891 .. . 

1892. 

1893 

1894 ., 

189'5 ..: 

1896 

1897 

1898 

1899. 

1900. 

1901 

1902...... 

1903 

1904.... 

1905 

1906 

1^07 

1908 

1909 

Average 

The same figures for the second group of the six medium com- 
panies give earning rates of 6 per cent., 8.9 per cent., 6.9 per cent., 
4.8 per cent., 9.2 per cent, and 4.6 per cent., or an average for all 
six of ^.^ per cent. The dividend rates have been 3.2 per cent., 
3.4 per cent., 3.7 per cent, 2.1 per cent., 3 per cent and 2.7 per 
cent., or an average for all six companies of 3.3 per cent., or to 
*%ummarize: isix medium-sized companies for the last twenty years 



United States 


Earning 


Dividend 


rate. 


rate. 


9.7 


6.8 


5.4 


6.6 


8.5 


6.4 


, —1.3 


6.3 


14.5 


6.8 


12.3 


. 6.4 


14.9 


6.2 


17.5 


6.0 


10.7 


5.7 


4.8 


5.4 


9.4 


5.4 


10.1 


5.3 


12.6 


5.1 


12.6 


4.3 


9.9 


4.9 


17.6 


5.2 


—14.0 


—1.3 


2.5 


5.3 


2^6.2 


5.7 


18.4 


5.2 


10.1 


5.4 



No. 30.] 61 

earned on the average Q.6 per cent, per year on tlie amount of 
money they had, invested in the business; just half of this was dis- 
tributed in dividends and half was kept in the business. 

The same figures for the third group of the six smallest United 
States companies give earning rates of 8 per cent., 6.2 per cent, 
5.9 per cent., 4.8 per cent., 2.3 per cent, and ^.2 per cent, or an 
average for all six of 4.5 per cent. The corresponding dividend 
rates are 4.7 per cent, 4.4 per cent., 3 per cent, 5 per cent., .7 per 
cent, and 2.9 per cent., or an average for all six companies of 
3.4 per cent, per year. 

Of the six new companies, one shows an average profit for ten 
years of 28.5"^ per cent.; its dividend rate, however, was only 3.9 
per cent., showing that most of this large profit was put into sur- 
plus. One year in the history of this company showed a profit 
of 62.1 per cent. For the six companies the figures are as follows: 

Company 1, earnings 28.5 per cent., dividends 3.9 per cent 
Company 2, earnings— -2.3 per cent, dividends —13.8 per cent. 
'Company 3, earnings 5.1 per cent, dividends .8 per cent. 
Company 4, earnings — 2.6 per cent., dividends —10.2 per cent. 
Company 5, earnings 8.7 per cent., dividends 6.6 per cent. 
Company 6, earnings — 1.6 per cent., dividends — 2.3 per cent. 

That is, of six new companies chosen at random, all of them 
between five and ten years of age, three have lost money. 

The figures for the United 'States branches of companies of 
other countries are as follows :f 

Company 1, earnings 9.3 per cent., dividends 6.2 per cent 

Company 2, earnings — 4.7 per cent., dividends — 6.8 per cent. 

Company 3, earnings 6.7 per cent., dividends 2.1 per cent. 

Company 4, earnings 5.1 per cent., dividends 1.7 per cent. 

Company 5, earnings — 1.1 per cent., dividends — 7.1 per cent 

Company 6, earnings — 14.8 per cent, dividends — 19.4 per 
cent. 

That is, of six companies of other countries three have lost 
money in this country. 

These figures seem to demonstrate several things very clearly, 

* This company and its methods are exceptional. 

t Dividends to stockholders were taken as balance between remittances 
to nnd from home office, 



6^1 [AsSEMBLir 

first, that wliat money is being made in the business is being made 
by the old, large, established companies, that new companies are 
quite as likely to lose as to make money, and that in a general 
way the prosperity of a company is in pretty close correspondence 
with its size and standing. 

Second. It seems clear that the companies on the whole, have 
not made an excessive profit. The best companies have averaged 
10 per cent, profit for the last twenty years of which half has been 
kept in the business. In a mercantile or manufacturing business 
this would be considered a good return, but it must be remembered 
that in a fire insurance company everything may be lost in a con- 
flagration. And yet these figures are only for the largest com- 
panies; the small and medium-sized companies have earned 
scarcely more than they could have earned if they had invested 
their money in bonds or mortgages and done no insurance business 
at all. 

This showing is • substantia ted, first, by the fact that no com- 
pany of the first rank has gained a footing in the business during 
the last thirty years, and^ second, by the record of companies 
which in that time have been organized and dissolved. The 
records show, according to testimony, that out of 213 companies 
admitted to do business in this state in 1875 there are only 69 of 
the original number remaining, the other 144 having withdrawn 
and in nearly every case gone out of business. 

In this connection the fact was brought forward that in gen- 
eral the directors of a fire insurance company own only a small 
part of .its stock; the average for the six largest companies is 
7 per cent., and for all the companies 20 per cent. It is further- 
more a fact that fire insurance companies are not being organized 
in general by men who are most familiar with financial condi- 
tions; it is stated to be impossible to secure money in Wall street 
for the organization of fire insurance companies and that the 
money in fire insiirance belongs very largely to small investors. 

The figure© that have been presented seem to show that on the 
whole the companies have not been making an excessive profit; 
the question whether the premiums have been too large reduces 
itself, therefore, to the question whether the expense has been too 
large. The subject of expense will be considered later. 



Ko. 30.] 6.3 

Discrimination Among Classes. 

However^ it would not necessarily follow, even if the premiums 
on the whole were right that they were right in detail; that is, it 
may still be that one class is rated too high and consequently 
another too low, that the rates in one part of the country are 
unwarrantably high while the rates in another part of the country 
are too low, that the rates now are perhaps too high against a time 
a few years ago when they were perhaps too low. 

This in reality is true. To be equitable the rates should 
measure the hazard; as an actual fact they depend, not merely 
upon the hazard, but upon competitive conditions. For instance, 
the rates in general are too high on protected dwellings and small 
dwelling-stores. This is demonstrated by the fact that these 
classes of risks and perhaps a few others are referred to by under- 
writers as ." preferred risks '' and what is stillmore to the point, 
by the fact that the competition for this particular business is very 
keen. This shows itself by the payment of excessive commissions 
and by the fact that most companies will not accept from agents 
the less desirable risks unless they produce also a large amount 
of the preferred business. 

There are, doubtless, classes which are rated correspondingly 
low. There, are some risks that many companies will not write 
at the schedule rate. In general the class of contents of mercan- 
tile buildings is often an unprofitable class at current rates, at any 
rate it is less profitable than the buildings themselves. 

ISTow, why should there be these differences ? What is the force 
that prevents the rates from corresponding to the hazard? The 
answer will be more evident in the light of this further observa- 
tion, that in general the rates are too high on low-rated risks and 
too low on high-rated risks, that is in general, that hazardous 
classes are paying less than they ought to at the expense of non- 
hazardous classes which are paying more than they ought to. Ana 
the reason for this is a very natural one, that, it is easy to collect a 
small premium and hard to collect a large one. 

The hazard of ]3rotected dwelling houses, for instance, is so 
small that it is an easy matter to collect more than is sufficient; 
the policyholders are contented in their ignorance; in general the 
property they own is small and there is no pressure, and particu- 



64: [AssfiMSLY 

larlj no united pressure, brought upon tlie companies to reduce 
their rates. On the other hand one who pays a larger premium 
on a hazardo.us risk is keen to get every concession and particu- 
larly as such risks are likely to cover very large values. The con- 
sequence is that the companies in general find it impossible to hold 
the rate up stiffly on such classes. 

The fact that rates are controlled by competition, and not en- 
tirely by the hazard, is shown also by the experience of the com- 
panies on sprinklered risks. The Mill Mntuals, as is well known, 
were the pioneers in what has resulted in a revolution in the con- 
struction and equipment, from a fire-preventive point of view, of 
factories. The plan of standardization and inspection which was 
adopted by the Mill Mutuals, and which is referred to in more 
detail elsewhere in this report, was so successful that the stock 
companies, in order to retain even a share of this business, were 
forced to adopt the very same plan. To this end associations were 
formed, one with headquarters in Hartford, and one with head- 
quarters in Chicago, known as Factory Insurance Associations. 
Some twenty of the principal companies are members of these 
organizations. 

The technical work of these associations consists in examination 
of plants, the preparation of plans for sprinkler equipments and 
other fire-preventive devices and inspections to see that these are 
properly installed and maintained. 

The significant point about these associations, in the present 
connection, is, however, the fact that a risk is not turned over to 
them by the companies except under pressure of competition from 
the Factory Mutuals.* 

A risk which was insured in stock companies and not threatened 
by the Mutuals would not be able to obtain an inspection by the 
Factory Insurance Association. But when there is danger of its 
being taken by the Mutuals the Association is put upon the risk 
and the rate may drop in some cases very materially from what it 
had previously been, even under the same conditions. 

The facts then are that while as a general thing rates are fairly 

* This is not strictly true, as within a few months these associations have 
adopted the more liberal policy of forestalling competition, but the condition 
has been as described up to very recently. 



IsTo. 30.] 65 

■ well graded according to the liazard, and while the tendency of 
schedule rating is strongly in this directioii, the rates on certain 
classes, in particular the so-called " jDreferrcd risks " and the 
^ " sprinklered risks '^ are governed by competitive conditions rather 
'"" than by the hazard alone, and that in general the rates on these 
classes are likely to be unwarrantably high unless they have been 
reduced by the competition of non-stock companies. 

The situation is a perfectly natural result of competitive condi- 
tions. The grocer in the same Avay sells sugar and flour very close 
to cost and makes most of his profit on coifee and tea and spices. 

But it is right here that we begin to get some clear light on this 
matter of combination. As long as the companies act in open com- 
petition they should evidently be governed by the laws of compe- 
tition and, let him who bargains beware — he may pay too much 
for his insurance, he may pay too little, but he cannot seriously 
complain, for he knows the conditions of the game — but the min- 
ute that the companies begin to combine the laws of competition 
are superseded by the laws of equity; the price is no longer the 
price that can be wrung out of the public in an open barter, but it 
is a price based strictly on the hazard. 

This principle will be readily admitted by underwriters. They 
very commonly speak of insurance as a tax, meaning by this that 
the companies are merely acting as agents to collect from the many 
who are exposed to a hazard a contribution to be applied to the few 
who suffer the loss. But that a tax should be equitable is at the 
very basis of the idea of a tax. Oonclusive evidence that the 
underwriters readily admit that with combination should be asso- 
ciated equity of rate is evidenced by their willingness to discuss 
his rate with the insured and to go to some length in attempting 
to justify it. In fact it is unquestionable that the whole tendency 
of combination has been toward equity in rates. Schedule rating 
is, of course, the greatest factor in this, making discrimination 
impossible and insuring essential equity between classes. 

Our conclusion then is that combination and equity in rates 

should be inseparable; not only has experience shown that equitable 

W rates are impossible in the absence of combination, but conversely, 

if there is to be combination then out of it must (by the help of law 

if competition is not sufficient) come equitable rates; that is, if 



66 [Assembly 

companies are to he allowed to combine then it must be only on the 
assurance that the rates will he equitable. 

The iS'tate is certainly justilied in taking anj steps necessary to 
see that this condition is maintained. The question that no^ 
arises is whether it is necessary and desirable for the sS'tate to 
undertake to regulate rates or whether the force of competition, 
properly guarded by publicity, can be trusted to accomplish this 
result. 

The question of competition in fire insurance has not been under- 
stood. It has been generally assumed that a combination of fire 
insurance companies was exactly like a trust, that there was no 
internal competition among the members of the combination. This 
is certainly not so. In reality the companies that form a tariff 
organization are in the most intense competition with each other, 
and what the combination chiefly does is to prevent this competi- 
tion from producing havoc with the rates. The existence of compe- 
tition is unquestionable; in fact, it makes the continued existence 
of a combination always a matter of uncertainty. Tariff organiza- 
tions are not in general longlived. There is almost always a cer- 
tain amount of underhand cutting of rates, and when this condition 
becomes unendurable the organization is abandoned, a rate war 
ensues and a new organization is formed only after the companies 
find that for their very existence they must get together again. 

The tendency of the companies inside of tariff organizations is 
asserted to be in general toward the lowering of rates, pressure 
being brought upon a particular company or companies by the 
insured and through them upon the organization. 

Testimony has been given by several witnesses, and the same 
statement is often seen in print to the effect that the companies 
do not desire to see excessive rates because of the competition of 
new companies that will be attracted into the business. 

The nature of competition in fire insurance is certainly very 
different from that in most other enterprises. To compete with a 
railroad it is necessary to build a new line, and when it is there 
it is there once for all and must be maintained unless the invest- 
ment is to be a total loss. But the investment in a fire insurance 
company consists entirely of securities ; there is no plant to speak 
of, even the agency system consists for the most part of agents who 



E"o. 30.] 6t 

are already in the field for other conipaiiies. It is, therefore, a 
business that capital can he very readily thrown into and from 
which it can be jnst as readily extracted — usually by reinsuring. 

It is a business, furthermore, in which competition is very in- 
tense — for this reason : outside of the large cities the business 
of 'the country could be done by a dozen companies, but in the 
large cities there is a dearth of insurance — this is because of the 
conflagration hazard — 150' companies are bidding for the busi- 
ness that could be done by a dozen ; the competition is, therefore, 
very keen, since it is necessary that each should have a slice to 
balance the business which is exposed to a conflagration. 

It is asserted that the conservative companies much prefer the 
stable conditions that prevail under normal rates to the unstable 
conditions that result when the rates are excesisdve. 

Bieside the competition of companies that are inside the organi- 
zation, board companies, so-called, there is in general a competi- 
tion from the non-board companies. These companies, not being 
members of the organization, are not bound to observe any par- 
ticular schedule of rates. As a matter of fact they inform them- 
selves with regard to the board rates and to a degree observe them, 
cutting the rate where it becomes necessary to secure desirable busi- 
ness. The competition of the non-board companies of course tends 
to keep the board rates down. In most parts of the country there 
are many non-board companies. In 'New York city, however, the 
companies that are authorized by the state are all members of the 
Exchange. 

Beside the competition of the board companies with each other 
and with non-board companies there is a considerable competition 
from the Mill Mutuals, the Lloyds and the Town and County 
Co-operatives. 

The inequities with regard to classes have been spoken of and 
will be reverted to later. Inequities in rate with regard to place 
certainly exist. However, so far as ^ew York state is concerned, 
they do not seem to be serious. As to the state as a whole the 
average rate is the lowest of any (with the exception of Delaware) 
of the United States. Such' inequities in rate are certainly much 
fewer than they used to be. 



68 [Assembly 

The fact has been referred to that '^ preferred risks " and some 
others are confessedly rated too high, irresj^ective of the fact that 
there may be other inequities which are masked by lack of definite 
knowledge. It is worth while to ask whether this inequity is a 
serious one. First, as to the owner of the '^ preferred risk : " he is 
paying only a small premium at most and does not complain ; 
nevertheless the fact remains that he is paying more than his share 
of the fire loss. iSecond, as to the agent and the company that 
receives the premium: this is a more serious matter in its conse- 
quences, and will be discussed later under the general subject of 
agents. Third, as to the risks that are paying too little at the ex- 
pense of others : the most serious effect here is that since the rate 
is not made proportional to the hazard there is insufficient incen- 
tive to the insured to improve his risk. Any underrating of haz- 
ardous risks is an economic mistake. It is a mistake to assess a 
conflagration charge over the country as a whole; it ought to fall 
on the cities and districts where it belongs, otherwise^ the country 
is paying, for the hazard of the city, the city grows at the expense 
of the country. The congestion problem is serious enough; it 
ought not to be fostered by a maladjustment of insurance rates. 

It may be said with regard to maladjustments of rates that it is 
a matter that will take care of itself if given publicity. The rates 
on dwellings have in general been coming down for years, and the 
companies will reduce them still more if the public demands it. 
They will not readily do this, however, until they are pressed to it. 
If, on the whole, the premiums are not excessive, it, however, 
would mean an increase of rates in certain other classes. 

•jClassificatioit. - 
This leads up to the general subject of scientific rating. In 
spite of modern developments in schedule rating the fire insurance 
business to-day is still done in a very unscientific way. To a cer- 
tain extent it must always be somewhat unsatisfactory as com- 
pared, for instance, with the exact methods of life insurance. The 
reasons have already been referred to, the very great complexity of 
the problem, the changing conditions, the presence of an indeter- 
minate conflagration hazard. This, however, is not a sufiicient 
excuse for abandoning the whole problem and doing nothing, dis- 



'No. 30.] 69 

missing liie whole subject with the obseTvation that fire insurance 
is nothing but guesswork and never will be anything else ; and this 
is the attitude of many underwriters. 

It is simply a very complicated and difficult problem in. classifi- 
cation; if anything is to be done with it this must be recognized 
and it must be dealt with accordinHv. 

All problems in classification are difiicult and different from all 
others ; this one undoubtedly is particularly difiicult. 

Practically the only light that is thrown upon the hazards in fire 
insurance is that of experience ; and furthermore, the experience 
to be worth anythins.- must include not one but many similar cases. 
The gathering together of this experience can to a degree be done 
by the mind unaided; so gathered and assimilated it becomes 
known as ^'underwriting judgment.'' In addition to all that can 
be done by the helj) of exact classification there will always be 
opportunity for all that the cleverest underwriter has of 
underwriting judgment. 

Two objections that are frequently made to classification in fire 
insurance are, first, that, if the classes are made large enough to 
afford a proper average the class will be so comprehensive, v/ill 
embrace such a large range, that it will lose its practical value; 
second, that if it is made definite enough to be of practical value 
the number of examples of the class will be too small to yield an 
average. But these objections are not peculiar to fire insurance ; 
they are the two extremes between which any problem in classifi- 
cation must be kept ; and while they are important they are com- 
monplace; they are tal^en for granted. 

There are two principal uses for classification — ^and in this it 
is assumed that schedule rating is contemplated. The first use 
is to furnish detailed knowledge with regard to the elements of the 
hazard upon which to base the charges of the schedule. This is 
confessedly a very difficult matter, and it is freely admitted that 
only the main points could be 'ascertained in this manner ; most of 
the detail would have to be put in with the help of underwriting 
judgment. 

The second use for classification is as a test of the correctness of 
a schedule when made. The very fact that the details of a schedule 
must be largely a matter of underwriting judgment makes it of 



TOi [Assembly 

the greatest importance to be able to subject tbe schedule when 
made to a test to see bow nearly right this judgment has been. 

The obvious first test to apply is to see whether it has produced 
the proper amount of premiums, to be gauged, of course, by the 
hre loss, on the business as a whole. But this is only a crude test ; 
the schedule may be producing too much revenue on one class and 
too little on another. It becomes desirable, therefore, to test it on 
different classes, and in a great variety of ways. If the schedule 
should stand all these different tests it would be pretty conclusive 
evidence that it contained no serious defects. 

The practicability of classification in fire insurance has been in- 
creased tenfold by the modern sorting machine, such as is used in 
the tabulation of the United States census; in fact, it is not too 
much to say that this machine is capable of revolutionizing any 
business in which a detailed mass of statistical knowledge is im- 
portant. Problems which before would have called for hundreds 
of clerks and volumes of weary tabulation can be run off on a ma- 
chine with an incredible degree of efficiency. The information with 
regard to the individual is punched on a card and these cards so 
punched can be sorted to make any desired exhibit. It is absolutely 
within the bounds of practicability that all pertinent information 
with regard to each risk in fire insurance should be punched upon 
a card and when so done and filed it becomes only a mechanical 
process to separate any information that is desired: for instance, 
the amount at risk and the premium receipts in any given portion 
of the city; the amount of premium receipts, the amount at risk 
and the losses in any given class or on buildings of any given type 
of construction. 

The scientific determination of rates has been highly developed 
in life insurance. Up to the present, however, the problem has 
been very simple for insurance was carried on in practically only 
one class, that of standard lives, that is, persons who could pass 
the medical examination. N^ow, however, as that field has been 
pretty fully covered, the companies are pushing into the field of 
impaired lives, substand.ard lives so called. When this is done 
their problem will be essentially the same as the problem in fire 
insurance, that is, a company will make a special rate for instance 
for the following risk, taking all the facts as given into account : 



-No. 30.] .71 

Age : — 3i5. Occupation : — Printer. 

Family history: — Mother died of consumption, father died of 
Bright's disease. . 

Personal health: — Over-weight, recently recovered from pneu- 
monia. 

It will be readily seen that these are the elements of the hazard 
just as details of construction, occupancy and exposure form the 
elements of the hazard in fire insurance; and in fact one of the 
companies at least is already issuing rates for substandard lives 
that are based on a schedule whose, principle is similar to that used 
in fire insurance. 

The difference, however, is this: the companies, as a basis for 
what they plan to do, that they may act intelligently in making 
rates, have united, through the medium of the Actuarial S'ociety 
of America, to combine their experience. The work is thoroughly 
planned and well under way; the cards are being punched in the 
separate offices; they will be united and classified by the sorting 
machine into a great variety of groups. The result will be a very 
complete statistical study of the influence of occupation, locality, 
family history, and personal impairment upon length of life; it 
will be founded upon the experience of a large number of com- 
panies on hundreds of thousands of lives. 

This is very different from anything that has been done with the 
the corresponding problem in fire insurance. iStrange as it may 
seem, rating organizations in the fire insurance business do not 
themselves possess any classified experience. The companies to be 
sure keep their classifications, but these figures are not combined 
and the rating is done by a committee which makes the rates upon 
the basis of a comparison of the members'- own underwriting ex- 
perience. Attempts have frequently been made by underwriters to 
induce the companies to combine their exprience as a basis for use 
in making rates, but these attempts have invariably failed. 

The reason for this is that a company considers its experience a 
trade secret and is so jealous of it that it will not submit to its be- 
ing used for the public good. There is in Chicago an organization 
of about twenty companies which have combined their experience 
but it has not been done for the purpose of making more equitable 
rates but for the benefit of the companies themselves which will 



72 [ASSEMBI^Y 

thus be advised what business they can with profit accept and 
what they had better reject. 

The situation here is perfectly clear. A' trade secret in fire - 
insurance can be nothing more than the fact that a company has ' 
found certain classes profitable and certain classes unprofitable at 
existing rates and this means nothing more than the fact that the 
rates on certain classes are too high and on others too low. 'No^Y 
any information that is capable of being used to show a company 
how it can make money in view of existing, inequities in rates is 
equally capable of being used to make the rate equitable to start 
with. 

This is exactly the point where we find the companies falling 
short in that balance which mus.t subsist between combination on 
the one hand and equity on the other. The companies recognize 
the principle that in return for the right tO' combine they must 
make equitable rates and it can be said that in general the tendency 
is quite in line with this but in actual practice they fall short. 
But what is there for it. save that they should go the whole length 
and throw these so-called trade secrets into the mixing 2}ot that out 
of them may come truly equitable rates. 

A few perfectly candid underwriters answer that this would take 
all the fun out of the business and leave it a game that anyone 
could play. The answer is that very likely this is so; it may per- 
haps not be as interesting to live now as it was in the Middle Ages. 
The fact is^ however, that this is not the Middle Ages, that the 
world is moving in a certain direction and the wisest thing one can 
do is to find out what that direction is — and act accordingly. 

It is perfectly certain that the public has a right to demand and 
is going to demand that in return for the right to combine the 
companies shall furnish equitable rates and not only that but that 
they shall put themselves into the position to demonstrate that 
they are furnishing equitable rates so far as that is humanly 
possible. 

The old type of underwriter is passing. He did not believe in 
preventing fires ; fires were what made business for the under- ( 
writers ; it w^as the function of insurance simply to distribute the 
fire loss and if the people preferred to burn their property it was 
not his business to interfere; it was his business to see that plenty 



-No. 30.] 73 

of premiums were collected to pay the losses, — it was not im- 
portant wlio paid tliem so long as they came in ; incidentally, how- 
ever, he had a shrewd eye for the business in which there was a 
good profit and let his less keen brother take the rest. 

That type has nearly gone. The new underwriter has his face 
turned in quite another direction. His motto is : ''. Equitable rates 
and fire prevention and a steady profit, all through combination. '^ 

Combined Loss Expeeience. 

iSince the underwriters have failed to take the initiative in the 
collecting of a combined loss experience and since it is necessary, if 
rates are to be equitable and demonstrably equitable, that such 
fio-ures should be available it seems inevitable that the State should 
undertake this work. It would fall in very naturally with its 
other work along the lines of publicity. 

Each company should report to the Superintendent its classified 
experience for the year and for the whole of the country. Such 
a plan, however, has so many dangers and so many difiiculties that 
it should be adopted only after most careful consideration. At 
present each company has its own separate method of classification ; 
most of these are very bad. If the companies were to report to the 
'State it would, however, necessitate the adoption by all of a uni- 
form system. It would be necessary to plan such a system with the 
most extreme care. Another danger lies in the possibility that 
different states might demand the experience of the companies 
classified in different ways ; this would plunge the companies into 
maddening confusion. 

While, therefore, it is certainly desirable that loss experience 
should be gathered and made a matter of public record no state 
should enter upon this without the most careful consideration. It 
is properly a matter which should be handled by a committee of 
the i^ational O'onvention of Insurance 'Commissioners in conference 
with the companies in the same way that the subject of uniform 
blanks is handled. 

InSUEANCE xiND EIEE PEEVENTION. 

There is nothing more interesting in the fire insurance business 
to-day, no, in the insurance business, for it is coming or has come 



74 [Assembly 

all along the line, than the way in which the insurance of losses 
is broadening its grasp to take in the prevenUon of loss. 

This is not an easy matter to understand but it is of profound 
economic significance. For if an agency which primarily is de- 
signed to prevent the ill-effects of loss can. be enlisted in tlie work 
of preventing the loss itself, we have an amazing potentiality for 
good, all the more so that this connection has been developed along 
purely economic lines. 

The matter is on the face of it hard to understand for apparently 
by preventing fires underwriters are cutting out the very source of 
their revenue; and yet it is possible to go a long way toward ex- 
plaining this connection between insurance and prevention on 
purely econoimic grounds. 

In the first place the establishment of schedule rating, the 
analysis of the hazard, the penalizing of definite elements of 
hazard, puts in the hands of the public an instrument which it 
can use with tremendous effect, even without encouragement from 
the companies, to improve conditions in the way that has already 
been referred to. The companies, however, have co-operated in 
this work, not perfectly to be sure, and yet on the whole very ac- 
ceptably. 

So much schedule rating does and in a more or less mechanical 
way. But beside this the companies are carrying on an active 
crusade to reduce fire loss. The work of the ]N"ational Board of 
!Fire ■ Underwriters has already been referred to and while this is 
the principal single lagency which is engaged in this work it is 
helped along to a degree by local boards and other organizations. 

While it is undoubtedly true that an underwriter who has once 
become interested in fire prevention developes an interest in it as a 
citizen that goes beyond his interest as an underwriter it is possible 
to account for his interest on business grounds. 

The Coi^flagratioi^ Hazard. 

In the first place the conflagration hazard is an unspeakable 
menace to the underwriter as well as to the public. iSo far as 
ordinary losses go there is no particular difiiculty; they are suffi- 
cient among themselves to give a remarkably stable average. In 
this field a large, well-established fire insurance company is nearly 



¥o. 30.] 75 . 

as stable as a life insurance comjDanj. But the conflagration 
hazard is totally different. Great conflagrations fortunately do not 
come often but this very fact makes it impossible to obtain a work- 
able average and, as insurance is based upon general average, con- 
flagrations are strictly speaking outside the proper held of insur- 
ance. But as a practical matter they must be included, partly be- 
cause of the difiiculty of defining a conflagration and partly be- 
cause public necessity demands some agency that shall do this work 
even though imperfectly. 

During the last forty years there have been four large con- 
flagrations in which the insurance liability must have been in the 
neighborhood of $ 40 0,000, 0-00 . Assuming that these belong prop- 
erly to a period of fifty years and that the cost of them should rea- 
sonably be assessed to the twenty largest cities of the country it can 
be shown that on this basis something like 30 or 40 per cent, of all 
the premiums collected in those cities were necessary for con- 
flagration losses alone ; that is, that on this basis the cost to New 
York each year of its conflagration hazard, outside of what it may 
pay for the maintenance of the flre department, is in the neighbor- 
hood of ten million dollars a year. But while this affords some 
notion of the size of the conflagration hazard it is of very little 
practical assistance to an insurance company, simply because the 
law of averages does not work ; a fire may start in 'New York to-day 
which will make such calculations ridiculous and bankrupt most 
of the companies of the world. 

It i^ no wonder that in the face of this ever-present and yet 
entirely unknowable menace that the companies do not enter with 
interest into the refinements of rating. This explains, however, 
why the companies are interested in preventing fires in large cities. 
They recognize that the conflagration hazard must be stamped out; 
it cannot be tolerated, there is no economic machinery which can 
cope with it ; it must be stamped out just as tuberculosis must be 
stamped out. 

But there is still another reason why the underwriter is inter- 
ested in the reduction of fire loss. His premiums are paid some- 
times several years in advance against losses that have not yet 
occurred. If the underwriter can keep the loss ratio continually 
falling there vdll always be a larger margin of profit in the busi- 
ness, even though from time to time premiums are adjusted to the 



76 [Assembly 

lessened hazards. But if the loss ratio is rising, before the pre- 
miums have time to catch up, the losses will have been made. 
Years ago w^hen the margins v^ere large this v^as not clearly felt 
but to-day it unquestionably is strongly operative and indeed is 
sufficient in itself to explain the interest of the underwriter in fire- 
prevention. 

There is a strong analogy, which should not be passed by, be- 
tween the underwriter and the physician. Both are primarily in 
the business of curing ills, but both are coming more and more to 
be concerned with preventing ills. That in either case there can 
be this hearty union of the" two functions is a cause for public 
congratulation; publicity and education in the field of medicine 
and underwriting will lead to the gradual elimination of both 
disease and fire. 

In answer then to the underwriter who says that equitable 
rates make the business uninteresting, it can be said that the 
business is changing: the interest in the business to-day is coming 
to lie in fire prevention and the most progressive underwriters are 
those who most clearly see these tendencies. 

SUMMAiRY. 

As this subject of rating has turned out to be so comprehensive, 
it is desirable to make a summary of the whole matter. First, it 
is recognized that a rate equitably should depend upon the 
hazard ; that the hazard, however, is known in general only by ex- 
perience; that for this no one company has a broad enough ex- 
perience of its O'V^n and that, therefore, the making of equitable 
rates demands co-operation; furthermore, since the same rates 
are needed by all the companies, economy would suggest that the 
work should not be duplicated. 

Second. It has been demonstrated by the experience of all times 
and all places that open competition in fire insurance is an un- 
stable condition which leads to the general weakening of the com- 
panies, and eventually to the elimination of small companies, 
further that under open competition there is always discrimina- 
tion in favor of the policy-holder with influence. 

The only alternative to open competition is, however, combina- 
tion not merely to make but to maintain rates. This in general 
or certainly to a degree makes it impossible for the public to 



1^0. 30.] 77 

obtain insurance except at the prices fixed by the combination. 
This inability to bargain is resented by the public and the rate- 
making organizations have been referred to as trusts and com- 
binations in restraint of trade, and in many states so-called anti- 
compact laws have been passed forbidding the companies to com- 
bine either to make or maintain rates. 

Third. The effect of the anti-compact laws has been not to 
bring back a state of open competition^ for this, as has been said, 
is an impossible condition, but to introduce a weakened substitule 
for combination, the selling of "^ advisory " rates by an iiiclc- 
pendent rater. These rates in general are observed but as the 
companies are under no agreement to maintain them, the way is 
open to gross discrimination. The tendency of independent rat- 
ing is in general toward higher rates and toward a weakening of 
the beneficial economic effects of s<?hedule rating. Tlic dls 
crimination in anti-compact states has become so offensive that 
there is a strong movement toward IState regulation. 

Fourth. State regulation is recognized as a far more logic;;! 
condition than one in which anti-compact laws prevail, and in the 
main the objection to it are practical rather than theoretical. The 
principal question to decide is whether the conditions warrant so 
radical a step and whether it is likely that conditions w^ould 
thereby be materially improved. 

The most serious theoretical objection tO' 'State rating is that 
it would be likely to make it impossible for a company to recoup 
itself after a conflagration. The practical objections lie in the 
possibilities of its being used for political effect and the fact that 
the State does not possess and could not obtain, except with great 
pains and expense, the expert knowledge upon which to make 
rates properly. 

Fifth. It does not appear that there has been an excessive 
profit in the business; this w^ould seem to indicate that the pre- 
miums have on the whole not been too large. Discrimination be- 
tween classes is, however, found to exist, particularly in the too 
high rating of ^^ preferred risks." These are conditions, however, 
which will be cured by publicity and the general tendency tov/ard 
equitable rating is unmistakable. 

•Sixth. N"ot only is combination necessary for equitable rating', 



78 [Assembly 

but conversely the making of equitable rates is the consideration 
wbich should be demanded of the companies for the right to com- 
bine. 

Seventh. It is believed that competition and publicity are 
sufficient to insure this, particularly as the manifest tendency of 
schedule rating is in this direction. 

Eighth. It is shown that there is intense competition among the 
members of rate-making organizations and that this condition 
differentiates such organizations from so-called trusts, that ex- 
cessive rates are not desired as tending to lead to a dissolution of 
the combination and also to the organization of new competing 
companies and that a strong competition exists in most parts of 
the country from non-board and mutual companies. 

I^inth. As the companies have failed to co-operate in collecting 
a common loss experience which would serve as a basis for 
equitable rating, it is believed that steps should be taken toward 
the acquirement by the State of such statistics. 

It is the belief of this Committee that, in the present condition 
of the business, competition can be relied upon to keep the rates 
equitable, particularly if re-inforced by publicity. This Com- 
mittee fails to find any condition which would warrant the ex- 
treme "step of turning the rate making over to the State and it does 
not recommend iState regulation of rates beyond certain steps 
looking toward closer supervision of rate-making bodies and the 
securing of proper publicity. The Committee believes that State 
interference with rates has not been beneficial and has been 
brought about upon the wholly theoretical grounds that combina- 
tions in fire insurance were a menace to the people which an 
actual investigation of the facts fails to disclose. This Committee 
believes that a purely academic view of what combinations in fire 
insurance might do should not be allow^ed to usurp the place of 
what actual facts under a reasonable interpretation seem to show. 

Il^SURANCE CoMPAlSriES AND LEGISLATION. 

The interest of insurance companies in defeating adverse legis- 
lation is due as much to the inconvenience of adjusting themselves 
to changed and awkward conditions as to any real inherent con- 
cern in the matter. The public must have insurance and the 



No. 30.] 79 

public must paj for it. If adverse legislation makes it harder 
and, therefore, more expensive to do the business the burden falls 
upon the people, not upon the companies. The difference mainly 
is that the companies can do their business more agreeably and 
more rationally when the laws are reasonable. There should cer- 
tainly not be ill-considered legislation in a business which is so 
clearly mutual in its nature, where so obviously and so inevitably 
the entire cost falls upon the public. 

TAXATIOISr. 

The taxation of insurance companies is a good example of thiis. 
Insnrance companies are taxed a percentage upon their gross 
premium receiptSi. This is on the theory that the companies 
shoujd pay for the cost of siupervision ; in reality, however, the 
taxes collected from insurance companies far exceed the cost of 
maintaining the Department of Insurance. 'No reason has been 
discovered in this inquiry why the burden of government should 
fall more heavily on this busineiss than on other forms of corpo- 
rate activity beyond the fact of the ease of collection of the tax. 

Apparently the tax comes out of the profits of the business; in 
reality, it comes out of the pockets of the policy-holders. There 
is no way of preventing this ; it is inevitable. There is even a 
regular charge in the Mercantile schedule for " taxation and 
adverse legislation." 

The question then is whether a tax that falls uipon the indi- 
vidual in exact proportion to his fire hazard is justifiable. It is 
indeed, for this should be exactly the incidence of the tax for the 
maintenance of the fire department, for in the long run the fire 
department will be called upon just in proportion to the hazard. 

The real injustice of the tax lies in the fact that the insurance 
companies are made to collect it ; the result thus is to disguise the 
moral effect of the fact that a man who has a fire haard is penal- 
ized for it and to subject ihh company to abuse for the size of its 
premiums. Besides that, if the tax is collected through the com- 
panies the man who does mot insure escapes paying his share ; to 
this may be said in answer, however, that every plan of taxation 
falls more heavily upon tfie provident than upon the improvident. 

The further observation miffht be made that since the a2:e'nt 






80 [Assembly 

takes his 20 per cent, commission out of all the preminms he 
collects, that it is altogether likely that he gets some considerable 
share ofi that part that he collects for taxes, prohiablj very much ^ 
in excess of what it costs to collect taxes directly. This method I" 
is then wasteful in money as v/ell as in moral effect. 

The Yalued Policy Law. 

In a number of states there is a law called the " valued polie}^ 
law." This law provides that in the case of a total loss, the face 
of the policy shall be taken as conclusive evidence of the amount 
of the loss, that is, that in the event of a total loss the company 
becomes liable for the full face value of the policy. Wiscoaisin 
was the first state to pass such a law, and it is said that the cause 
of its passage w^as the fact that the farmers had been sufferers 
at the hands of sharpers w^ho sold lightning rods and insurance, 
and when the farmer came to collect on his losses he found he 
was greatly over insured, and that, even in the case of a total loss, 
he could collect only a part of the sum that he had paid pre- 
miums on. 

The law was designed to prevent over insurance. Incidentally, 
however, it breaks down one of the fundamental principles of 
insurance, — indemnity. One can be indemnified only for what 
he has lost 5 now if a house worth $7,0'0'0' is insured for $10,0O'0 
and the owner recovers $10',0'00' in case it is coaupletely burned, 
he has received only $7,000 of indemnity ; the other $3,0'0iO was 
won on a gamble, for the owner of the house was willing to pay 
the premiums on this extra amount in order to have the chance 
to win it if the house burned. But, when the event upon which 
the gamble depends is something that is within the control of the 
person interested, we have a ^^ moral hazard," namely, in this 
case, the hazard that the insured will either set fire to his house 
or that he will relax the carefulness which he would have main- 
tained if the burning of his house were going to mean a loss 
instead of a gain. 

A law which would really prevent over- insurance would be a % 
good thing, but the valued policy law is impracticable from this 
point of view. It was no doubt assumed that the law w^ould 
operate to make the agents assure themselves that in every case . 



JSTo. 30.] 81 

the face of tlie policy was not in excess of tlie value of tlie prop- 
erty. But as a practical matter this is impossible under existing 
conditions. It would require not only a careful inspection of the 
property by the agents but in many or most cases a detailed ap- 
praisal, and the cost of such work, — which would, of course, have 
to be borne by the policy-holder, — would double the rates. Be- 
sides that, it would still be ineffective, for the value of the prop- 
erty can so easily change : conditions can arise — for instance a 
business ceases to be profitable — which will make the property 
deteriorate in value. There is a serious moral hazard whenever a 
property, for which there is no demand and which is not produc- 
ing an income, can be sold, by setting fire to it, to an insurance 
company for more than it is worth. 

Desirable as it would seem to be, theoretically, to place upon 
the insurer the duty of determining values before the insurance 
is effected, as a practical matter it cannot be done; it is a part 
of the duty of the insured himself, foT he of all persons is the one 
■who know^s. In the process of effecting insurance there are many 
different pieces of work to be done ; many of these quite rightfully 
fall upon the company, but there are certain ones which must of 
necessity devolve upon the insured. Some of these are made war- 
ranties in the contract, but others are automatically fixed by the 
form of the contract. The duty, or self-interest, of the' insured 
in determining the value of the property is fixed by the provisions 
of the ordinary policy that the payment by the company shall be 
only for loss actually sustained, that is the policy provides im 
demnity but in no case beyond the so-called face of the policy. 

Of course, anything that can be done to make the insurer careful 
not to over insure is desirable, provided this good is not secured 
at toO' great a cost. A slight step toward this and one that might 
go some distance tow^ard mitigating the hard feelings of the in- 
sured would be a provision that, if upon settlement of a loss 
the property was found to be over insured, the excess premiums 
were to be returned. 

There is no question that theoretically and practically a valued 
policy law is against public policy; and yet it must be admitted 
that the actual effects of it in the states where it is in operation 
are not so serious as might be anticipated. The reasons for this 
are perhaps two: the companies have largely ceased to write 



8'2 [Assembly 

business on which under this form of policy there is a serious . 
moral hazard; and, second, the effect of the law has been largely 
nullified in the courts in their interpretation of '' total," thus . 
making the proportion of " total '^ losses in which the valued I 
feature is operative, very small. 

It can be said then in general about the law that where it is in 
free operation it must and does increase the moral hazard, but 
that- in actual practice its effect is, to a certain extent, to prevent 
free insurance, but in effect it is largely a dead letter. 

« 
The Co-i]srsuKxV]srcE Ceatjse. 

In much the same way that the rate in life insurance depends 
upon the age of the insured so the rate in fire insurance depends 
upon how large a percentage of the value is insured. This is not 
at all evident at first sight, and must be explained. 

Let us take so extreme a case that the force of the principle will 
be compelling. Suppose two stocks of goods of the same character 
and similarly situated, the only difference being that the first is 
worth only $5,000, while the second is worth $100,000. Let us 
suppose that in each case there is an insurance for just $5,000, 
that being the entire amount of insurance. I>row under which of 
these policies has the underwriter more at risk ? In the first case 
it will take a total loss to exhaust the insurance and a 5 per cent. 
loss will amount to only $250, but in the second case any loss that 
is over 5 per cent, of the value will exhaust the whole amount. It 
is vastly more likely evidently that there will be a loss of 5 per 
cent, (or over) in the second case than that there will be a total 
loss in the first case, for manifestly there are many fires that burn 
5 per cent, or over to the few that burn all. The insurance com- 
pany could therefore by no means afford to sell the insurance in 
the two cases for the same price. This is the simplest possible 
demonstration of the fact that the insurance rate must depend 
upon the ratio of insurance to value. In the first case this ratio 
was 100 per cent., in the second case 5 per cent. ; the rate must be 
higher as the ratio becomes lower. \ 

This can be stated in another way : the real cost of the insur- 
ance depends upon .the average loss payable under the policy, but 
this will manifestly be greater if the values are greater. 



AV 30.] 83 



H 



This can now be brought out in more detail. There are statistics 
that show that on a certain class of buildings there are approxi- 
mately the following losses for every $100 worth of property 
alue: 



On the average^ out of every 100' fires : 
82 that do a damage of less than $10 on the average 

$2, making altogether a loss of " $164 00 

6 that do a damage of less than $20 and more than 
$10 on the average $11, making altogether a 
loss of , 84 00 

3 that do a damage of less than $30 and more than 
$20 on the average $25, making altogether a 
loss of 75 00 

2 that do a damage of less than $40 and more than 
$30 on the average $35, making altogether a 
loss of 70 00 

1 that does a damage of less than $50' and more 
than $40 on the average $45, making 
altogether a loss of 45 00 

1 that does a damage of less than $60 and more 
than $50 on the average $55, making altogether 
a loss of 55 00 

1 that does a damage of less than $70' and more 
than $60 on the average $65, making altogether 
a loss of ■. 65 OO 

1 that does a damage of less than $80 and more 
than $70 on the average $75, making altogether 
a loss of 75 00 

1 that does a damage of less than $90' and more 

than $80 on the average $85, malving altogether 

a loss of 85 OO 

2 that do a damage of less than $100 and more 

than $90 on the average $99, making 

altogether a loss of 198 00 



100 Total $916 00 



84 [Assembly 

That is, every 100 fires bum altogether $916 worth of property^ 
supposing the property in each case to have had a value of $100. 
l^low if on each of these houses just $10 of insurance had beenL 
carried for every $100 of value, the losses to the companies wouli* 
have been as follows : 

82 losses of $2 each, making altogether $101 00 

18, losses of $10 each, making alto2:ether 180 00 



lOO Total $341 00 



It is obvious that on the eighteen losses in which -the damage was 
more than $10 only the face of the policy w^ould be payable. If 
we assume that there is one fire out of every 100 houses at risk, 
100 fires will represent 10,000 risks and the premium that must 
be collected from each of these 10,000 risks to pay this loss of 
$344 will be $344/10',00O or 3.44 cents. This, it is understood, is 
the net premium without any loading for expense. Three and 
forty-four one hundredths cents is the actual premium, but the 
rate, based on $100 is ten times this, or 34.4 'cents; that is, $10 of 
insurance at the rate of 34.4 cents per $100 amounts to a premium 
of 3.44 cents. 

^ow in an exactly similar way, the cost to the company of 
carrying $20 of insurance can be computed; there will be: 

82 losses of $2, making altogether $164 00 

6 losses of $14, making altogether. 84 00 

12 losses of $2 0, making altogether 240 00 



100 Total . . .:..... $488 00 



To pay this loss each of the 10,00'0 risks must be assessed 
$1,488/10,000 or 4.88 cents. This is the premium fo^r $20 of in- 
surance but the rate, on the basis of $100 is five times this or 21.4 
cents; that is $20 of insurance at a rate of 24.4 cents per $100 
will amount to a premium of 4.88 cents. % 

This samie principle can be carried out for any given amonnt of 
insurance. Take just one more case: suppose the insurance is 
$80. There will then be payable by the company : 



iTo. 30.] 



B5 



9 



82 losses of $2, making altogether . $164 00 

6 losses of $14, making altogether ' 84 00 

3 losses of $25, making altogether 75 00 

2 losses of $35, making altogether TO 00 

1 loss of $45, making altog'ether 45 00 

1 loss of $55, making altogether 55 00 

1 loss of $65, making altogether 65 00 

1 loss of $75, making altogether 75 00 

3 losses of $80, making altogether 240 00 

100 Total $873 00 



The sum that must be collected from each of the 10,000 risks 
will be $873/10,000 or 8.73 cents. This is the premium for $80 of 
insurance, but the rate on the basis of $100 will be 5/4 of this or 
10.91 cents, that is, $80 of insurance at a rate of 10.91 cents per 
$100 gives a premium of 8.73 cents. 

In the table below are presented the rates that will correspond to 
various percentages of insurance to value : 

If the insurance is 10,^ of the value, the rate should be. . . . $0 34 
If the insurance is 20^ of the value, the rate should be. . . . 24 

If the insurance is 30;^ of the value, the rate should be. ... 20 

If the insurance is 40/ of the value, the rate should be. .... 17 
If the insurance is 50/ of the value, the rate should be. . . . 15 

If the insurance is 60/ of the value, the rate should be. . . . • 13 
If the insurance is 70/ of the value, the rate should be. . . . 12 

If the insurance is 80/ of the value, the rate should be. . . . 11 

If the insurance is 90/ of the value, the rate should be. . . . 10 

If the insurance is 100/ of the value, the rate should be. . . 9 



This is not only a practical demonstration of the fact that the 
rate in fire insurance must depend npon the percentage of insur- 
ance carried, but, if the figures upon which it is based were correct, 
it would be a determination of what the net rate should be. It is 
understood, however, that the particular figures here given are only 
in way of illustration ; the principle that the rate falls as the ratio 
of insurance carried increases holds whatever the figures that are 
used, even though large losses were relatively more frequent than 
small ones. 



8i6 , [Assembly 

The principle tliat is here, established is that the rate in fire in- 
surance must equitably depend not only upon the class of risk, but 
upon the percentage of insurance carried, and that for example a 
rate of ninety- three cents which might be right if 80 per cent, of^^ 
insurance were carried would be much too low if only 30 per cent, 
were carried. 

The situation is exactly the same as in life insurance where the 
rate must equitably depend upon the age. A premium of $23 for 
a man 25 years old would be far too low for a man 65 years old. 
If insurance were sold to these two men at the same price the effect 
would be that the young man would be helping to pay for the haz- 
ard of the older man and, still more to the point, that eventually 
young men would refuse to enter into such an unfair bargain and 
the company would be doing a business only with old men for whom 
confessedly the rate .would be too low. 

The principle is exactly the same in fire insurance. If a man 
who carries 80 per cent, of insurance is charged the same Tate as 
a man who carries only 30 per cent, the effect is that the man who 
carries 80 per cent, will be helping to pay for the hazard of him 
who carries only 30 per cent., and still more to the point that the 
tendency would be, under this unfair arrangement, for men to re- 
fuse to insure for the larger 'amount. But that this ^' adverse selec- 
tion '' does not operate so strongly as in life insurance is due to two 
causes, first, that the principle is not so clearly seen as in life in- 
surance, and, second, that full, or nearly full insurance is in most 
cases needed at any price ; this is particularly so where the property 
is mortgaged, the oonditions of the mortgage requiring that the 
property be well covered by insurance. The situation then is this : 
equity to the policy-holder demands that the rate should be ad- 
justed to the percentage of insurance carried and to a certain ex- 
tent the result is, if this is not done, that insurers will carry less 
insurance than conditions demand. 

'Now, it is impossible to base a rate upon the percentage of in- 
surance to value,, unless this percentage is known. But to know it 
means to know the value of the property and here we are brought m 
up against the same difficulty that arises in the case of the valued * 
policy, namely, that, as a practical matter, it is impossible for the 
company to ascertain values. In the consideration of the valued 
policy law we have already reached the conclusion that this work 



Ilo, 30.] 87 

must devolve upon the insured for the neason that he, if anybody, 
is the one v^ho knows the values, at any rate he ought to know. 

That the resi3onsibility belongs with the insured is recognized in 
an agreement known as the co-insurance clause, in which the in- 
sured warrants that he will maintain at least a certain specified 
ratio of insurance to value and, failing so to do, he shall he consid- 
ered to he himself an insurer for the deficit. 

That is, a failure to maintain the provisions of this warranty, in- 
stead of tending to invalidate the insurance, simply brings in the 
insured in a new role, namely, as insurer for the balance by which 
the actual insurance that he carries falls short of what he warranted 
to carry. 

Or, to state it still differently, by the agreement the warranty is 
automatically observed because at the instant that the insurance in 
companies falls short of the required amount the insured himself 
enters as a " co-insurer." 

This, when understood, is reasonable, but its consequences are 
not easily seen. To understand its w^orkings completely, it is 
necessary to take some concrete cases. 

In the following examples an 80 per cent, co-insurance clause 
will be understood, that is, one in which the insured warrants that 
he will keep his property insured for at least 80 per cent, of its 
value. . Only cases will be considered in which the insured fails 
to live up to his agreement, as, of course, otherwise the settlements 
will be the same as though there were no such clause. 

Case I. 

Value .. . $10'0,000 

Insurance .i. . . .«. ,. . 50,000 

Loss :. . 20,000 



Here the agreement called for $80',000i of insurance; the 
policy-holder, is therefore, a co-insurer for $30,000. The insur- 
ance therefore stands : 

Companies $50,000 

'Himself . . .. . . ., 30,000 

Total . .■ $80,000 



88 [Assembly 

On any loss, therefore, the companies contribnte % and he him- 
self contributes %; on the loss of $20,000, therefore, the con- 
tributions are: 

Companies . . . ' $12,500' 

Himself 7,500' 



That is, in spite of the fact that he carries insurance of $50,000' 
he is able to collect only $12,500; the balance of the loss he is 
compelled to stand himself; v\^hy? because his rate was based on 
the assumption that he would carry 80* per cent, of insurance; in 
reality he carried only 50 per cent, of insurance and so doing he 
should have paid a higher rate. The rate that he paid was not 
sufficient under these circumstances to buy complete indemnity 
and the de'ficiency was measured by his own forced contribution 
of $7,500. 

Case II. 

Value ". $100,000 

Insurance , 50,000' 

Loss 80,000 



Here the value and insurance are the siame as in the previous 
case, the only difference being that the loss is larger, namely, as it 
happens, equal to the amount of insurance that he had agreed to 
carry. 

Here as before, as he is a co-insurer for $30,000, the company's 
contribution will be % and his %. But % of $80,000 is $50,000', 
the full face value of his policy; he, therefore, obtains from the 
company the full amount of his insurance, the $30,000, that he 
must himself contribute, being only the amount by which his in- 
surance falls short of the loss. 

Case III. 

Value . $100,000 

Insurance . . >. .> 50,000 

Loss ., ., .^ 90,000 



( 



1^0. 30.] 89 

Here as in tlie two previous cases, the contribution of the com- 
pany will be % and his own contribution %. But % of $90,000 
is $56,250. This is more than the face of the policy, and as the 
liability of the company ceases at $50',0'00, the policy-holder must 
stand this loss of $6,250 in addition to his own contribution as ^a 
co-insurer of $33,750, that is, altogether the $40,000 by which his 
loss exceeds his insurance. 

The conclusions are these: the co-insurance clause: is operative, 
in effect, only when the loss is less than that percentage of the 
value that is named in the ao-reement: on losses above this, for 



& 



instance total losses, the company is liable for the entire amount 
■of the insurance. An interesting consequence of this may be ad- 
verted to. If the co-insurance clause had been in use to any 
large extent in ^San Francisco the rates would have been corre- 
sponding lower and the amount of insurance carried would have 
been higher and yet the insured would have received the- full 
amount of their insurance because the losses were all practically 
total. 

The lowering of the rate has been referred to; the effect of the 
introduction of the co-insurance clause is, of course, so far as the 
liability of the company is concerned, to fix the ratio of insurance 
to value, so that it is possible and customary, upon this basis, to 
make the rate depend upon the percentage as we have seen that in 
equity is due. 

Usually 80 per cent, is taken as the standard, the rate for 90 
per cent, and 100 per cent, co-insurance being proportionately 
lower and the rate for percentages less than 80 being proportion- 
ately higher. In some places, as in 'New York city, the insured is 
not free to choose what percentage of insurance he will carry ; 
in that case, usually, as in New York city, 80 per cent, or over is 
prescribed. In practice this is not so arbitrary and harsh as 
might seem to be the case, first, because most of the insured desire 
to carry at least 80 per cent, of insurance and, second, because 
where, as in fire-proof office buildings, the insured might very 
naturally desire to carry only partial insurance, as a matter of 
fact full insurance can be given at scarcely any additional cost. 

The general conclusions we reach with regard to the coinsur- 
ance clause are theise: that the principle upon which it is founded. 



90' [Assembly 

namely, that rates should be based iipo[nj the percentage of insur- 
ance oa;rried, is not only .sound but is absoLitely requisite if the 
equities of the insured are to be preserved; second, tliat the co-^ 
insurance clause rightly recognizes, that as a practical matteir thev-* 
responsibility for maintaining a given percentage of insurance 
must rest with the insured ; third, tbat the operation of the agreie- 
ment is automaitic and fair. 

The. objections that can be urged to tbe coinsurance clause are 
not on theoretical but on practical grounds and are entirely due 
to the fact that it is in use where it is not understood. It is 
perfectly true that the coinsurance clause is a dangerous thing 
for a person who does not understand it and for a person who 
does not keep close watch of his values, — not dangerous in the 
sense that the insured will not get what he ought to get, but in 
tJie sense that he will not get what he thinks he is going to get. 
But, should the government undertake to shield those who enter 
into a contract which they do not understand if this must be done 
at the expense of the real equities of the mass of the insured ? 

The very purpose of the coinsurance clause is to place upon 
the insured tlie responsibility for ascertiaining the value of his 
property, and for keeping it properly insured; and it goes witL.- 
out Slaying that, having assumed this responsibility, he must live 
up to it or he will be caught at a disadvantage. 

■All that the insured needs to know, as a practical matter, is 
that in signing, say, an 80 per cent, coinsurance clause he agrees 
to keep at least 80^ peir cent, of the value of his property covered 
by insurance, and that in failing to do so he makes himself liable 
to the loss ofi part of his indemnity. 

A number of states liave laws prohibiting the use of tbei co- 
insurance clause, but among the larger, more intelligent buyers 
of insurance the demand has been so great for it that in one state, 
Michigan, a law was passed making it legal if signed by the in- 
sured ; and in another state, Missouri, the law by common consent 
of both parties is not observed, that is, the coinsurance clause is 
used although settlements under it cannot legally be enforced byi^ 
the companies if the insured cares to resist them. 

The enactment of an anti-coinsurance law in a state like E'ew 
York, where there are so many large values to be protected, and 



ISTo. 30.] 91 

• 

where the general standard of intelligence on insurance matteirs 
is high, would result in serious inequities and would meet with 
^trong opposiition from the insured. 

W The antagonism toward the coinsurance clause is veiry typical 
of the public attitude toward insurance in general. The policy- 
holder who, by his own carelessness, has been caught under-insured 
and hence cannot collect full indemnity loses sight, in the presence 
of his own personal and immediate grievance, of the fact that he 
and other policy-holders were getting their insurance- at a lower 
price because of this very agreement whose adveirsie effect he 
now feels. 

The equities of the mass are lost sight of; in other words, the 
short view takes the place of the long view. But the very nature 
of insurance demands that the long view shall prevail, otherwise 
the whole system breaks down. 

Expense. 

Out of every dollar that is paid into a fire insurance company 
on the average 3 8""/^ cents is paid out for expense. This seems 
a very large amount for a business which consists, essentially, 
simply in the collection and subsequent distribution of money. 
The following may be taken to be a no^rmal distribution of this : 

Per cent. 

Salaries, rent and general administrative expense 7.5 

Commissions i 21. 5 

Taxes . . . .i 2.5 

Special agents — salaries and expenises 3.5 

Inspections, local boards, etc 1 . 5 

Printing, postage, etc 2 . 



38.5 



Jf 



The largest single item of expense is the 21.5 per cent, that is 
aid to agents for commissions. This is a large amount to pay 
to a middleman. It is necessary to see just what value is received 
for this, just what the service is which is performed by agents. 



9'2' [Assembly 



Agekts. 



The agent in fire insurance is far more important tJaan is gqv- 
erally recognized. He it is who virtually decidos what risks ft,, 
company shall take, and what it shall refuse, and what shall he 
the specific, written terms of the policy. AVhile the company 
eixercises the right of review, it is manifestly necessary that it 
should in the main, rely upon the judgment of its agents. The 
character of a company is therefore very largely determined by 
the character of its agents. It is in their power to make or ruin 
a company's business. 

The agent is the one who comes in direct personal contact with 
the insured, the company never. Furthermore business is usually 
done by the insured with the agent on a purely personal basis 
rather than because he represents some particular company. The 
property owner gives his business to an agent whom he knows and 
in whom he has confidence and in general lets him select the com- 
pany that he will place it in. The fact that the agent has this 
personal clientele puts him in the position virtually of controlling 
a certain amount of business; as a matter of fact and as a matter 
■of law, the businesis belongs to him rather than to the companies ; 
it has been decided by the courts, for instance, that the expiration 
books are the property of the agent and cannot be claimed by the 
company. 

It will be easily realized then why the. agents have such a domi- 
nant influence. It is they who control the business ; the companies 
must come to the7n for business, and in general must come to their 
terms. The companieis seek the agents, not agents the companies, 
except to a degree in large cities. 

Fire insurance agents occupy a very curious and anomalous 
position. Legally and in fact they are agents for the companies 
and must protect the companies' interests, but at the same time 
their personal relationship with the insured makes them equally 
solicitous for his best interests. Add to this the fact that the agent 
represents not one but several companies and that he is called up([ 
to distribute his favors among thean all, and we have a notable 
example of a man who is serving many masters. That the system 
works as well as it does is remarkable and particularly when the 



l^o. 30.] 93 • ■ 

cipiallj aiionialous condition is noticed that in general agents are 
paid a commission upon the premium receipts, so that a large 
^'olume of business and particnlarlj of hazardous, high-rated 

Irsiness is for the benefit of the agent, irrespective of whether the 
suits are faA^orable or unfavorable to the company. 

The tendency is for companies in their competition for business 
to appoint agents, not for their real worth, but because of their 
abilitv to control business, and this even goes so far as the appoint' 
ment of persons who are qualified in no other way, persons who, 
because of their connections or because of the sympathy they com- 
mand for some misfortune, can turn over certain lines. 

When one considers the very responsible position of an agent, 
not only in binding the company, but in consideration of the fact 
that it is in his power, if he is ignorant or careless or otherwise 
Avrongly disposed, to write policies for his clients which will not 
properly protect them, the bad economic effect of the appointment 
of incapable agents is apparent. 

LN^ot only, however, do companies appoint agents who are not 
properly qualified or who have no qualifications beyond the fact 
that they can control a certain amount of business, but the tendency 
is to multiply agencies beyond the point where they serve an 
economic purpose, and to a point where they exist for purely 
competitive reasons. In other words this is an instance where 
competition serves no useful economic end. 

Competition. 

We may consider competition to mean a state in which sellers 
are trying to attract buyers and if the competition is open there 
is no bar to this. The inducements offered may be of various 
kinds ; in the first place the inducement may be a reduced price. 
This inducement is not made unless the buyers are in a position 
to understand and take advantage of it. In the recent inveisti- 
gation of life insurance, it was found that competition had not 
acted to reduce prices, for the reason that the real price was 

Jirgely dependent upon the dividends paid and this was so tech- 
jcal a matter that it was not understood by the insured. In life 
insurance competition is turned in other entirely different 
directions. 



94 [Assembly 

In fire insurance, on the contrary, open competition has acted, 
as we have seen, invariably to a reduction of rates beyond a point 
that was to the best interests of either insurer or insured. The 
result has been that either by agreement or otherwise prices it, 
fire insurance have been to a degree standardized and competition 
in that direction to that extent limited. 

Commissions. 

Inducements therefore of some further kind must be made. 
JSTow in fire insurance, the business is controlled as we have seen 
by the agents. The companies, therefore, instead of trying to in- 
fluence the insured make inducements to the agents. These in- 
ducements are of course mainly high commissions. In addition 
to this, however, the companies, as has been said, try to induce 
business by appointing more agents than are necessary and agents 
that are not really competent. 

ComiDetition, therefore, in fire insurance has acted badly both 
as regards rates and eixpenses, but in difierent . ways. It has 
driven rates too low and expenses too high. And just as the com- 
panies have combined to raise rates to a proper level and to stand- 
ardize them, so the more conservative companies have combined 
to lower coinmissions and to standardize theim. The so-called 
Eastern Union- in this territory and the Western Union in the 
Middle West limit their members to a definite scale of commission. 
It should be said, however, that certain of the largest cities are 
not included under the jurisdiction of these bodies; they are called 
excepted cities. 

In the Eastern Union territory the commission paid has been 
a flat 15 per cent. In the Western Union territory there has been 
a graded scale of 25 per cent, on preferred risks, 20 per cent, on 
brick mercantile buildings, and 15 per cent, on other classes. In 
the. excepted cities, the commissions are open; in general they run 
much higher than in Union territory, in some cases as high as 45 
per cent. 

The membership^ in the Unions consists in general of the strong " j' 
est, most conservative companies. Tlie non-Union companies out- 
number the Union companies, but in amount of business done the 
Union companies are much in the lead. 



^"0. 30.] 95 

The non-Uniou conipanieis are with few exceptions companies 
that are so weak as to be unable to procure the best business with- 
out offering some inducement either to the policy-holder in a re- 
%duction of rates (the non-Union companies are largely non-Board 
companies also) or to the agent in an increased commission. In 
the case of preferred risks this competition becomes intense and 
often leads to commissions that are absurd. In fact, competition 
on '' preferred risks " among the non-Union companies has gone 
Qo far as to drive them, in Western Union territory, into a " non- 
Union " union, called a '' Bureau," with a scale of commissions 
somewhat higher than that of the Union companies. 

In general the Union companies have been able fairly w^ell to 
meet the competition of the non-Union companies, the advantage 
of their greater strength more than offsetting the induoements 
offered by their competitors, but in the Eastern Union territory 
the cO'mpetition has recently become so intense that the Eastern 
Union has been on the verge of dissolution. It has been saved 
only by yielding to the pressure of the agents and raising its com- 
missions to a graded scale similar to that of the Western Union; 
at the same time, however, steps have been taken to reduce com- 
missions in the excepted cities. 

The whole subject of commissions is a very perplexing one; 
it is a matter which is in a continual state of agitation between 
the companies and the agents; the companies admit that condi- 
tions are wrong but they profess to be lat a loss to know how to 
better them and many underwriters go so far as to suggest that it 
may be necessary for the State to limit commissions in fire insur- 
ance as it has limited commissions in life insurance. An im- 
partial observer, however, is moved to ask, since it is granted that 
most of the trouble about commissions is due to preferred risks, 
why the companies should not stop hacking at superficial evils and 
attack the root of the matter by reducing the premium rates on 
^^ preferred risks;" to satisfy the public that they are thoroughly 
in earnest in their undoubted desire to reduce the expense of the 
business this step must be taken. 
9 It is strongly contended by many underwriters that the high 
commissions paid on preferred risks are not too high; that the 
business, which is mostly dwelling-house risks, comes in such 



96 [Assembly 

sanall pieces and is in other ways so difficult to write that it 
should be paid a higher rate. There is some justice in this, but 
it does not quiet the matter, for the companies by offering higher 
commissions on this class are responsible for the situation, not the m 
■agents by demanding them. ^ 

It is possible that in some cases at least, the commissions on 
prefeirred business are not too high, but nevertheless they are, in 
the way that they have come about, a clear indication that the 
business is rated too high. 

The making of the rates equitable on all classes and hence the 
elimination, so far as that is possible, of the '^ preferring " of 
any one class would perhaps not solve the commission problem 
but it would certainly go siome distance in that direction. 

The proposal to limit commissions by law should b© kept as a 
last resort. There is an intimate relation between rates and com- 
missions, but of the two the subject of rates is more fundamental. 
Rates are getting steadily more equitable; furthermore, the fire 
insurance business is changing now very rapidly ; time should be 
given to see whether the further progress of rate equalization and 
the rapidly changing conditions and spirit of the business will not 
bring improvements in the matter of commissions. If this is not 
accomplished it would certainly be within the proper function of 
the Stat© to see that this eixpense is regulated by law. 

In this connection the subject of contingent commissions should 
be spoken of. Theoretically it seems entirely wrong to pay an 
agent a flat commission upon premiums, because by this system of 
payment he fails to have his interest identified with the interest 
of the coinpany and the public in the prevention of fire-loss. He 
gets his premium whether the risk burns or not, and in fact to a 
degree an occasional fir© helps his business by bringing to peoples' 
attenltion'the need of insurance. As to the actual workings of the 
system only this can be said : there are all kinds of agents as there 
are all kinds of men in general ; some are very careless about writ- 
ing risks, some are very careful. But on the whole agents are not 
interested in fire-prevention to any such degree as the companies. 

This seems radically wrong, for no one touches the problem of \ 
fire-prevention so intimiately. It has been propois^^^d to force an in- 
terest in the agent in fire-prevention by making part of his commis- 



'No, 30.] 97 

sion contingent upon the earnings of the company upon the busi- 
ness which he has written. In fact one kirge and prosperous com- 
pany already pays many of its agents U2>on this basis. * Some few 
objections have been made to this plan, but none that seem im- 
portant. The plan of paying agents contingent commissions was 
endorsed by the lasit Convention of Insurance Commissioners. 
Your Committee does not recommend legislation upon this subject, 
but thoroughly commends the principle of contingent commissions 
and believes that it should be put into general practice by the com- 
panies. 

The expense problem is unquestionably the most perplexing 
problem in the business today. It is seen that the tendency of 
free com23etition is to drive commissions higher and higher and it 
is difficult to see what will restrain this tendency except combi- 
nations of the companies to regulate commissions. Such organi- 
zations then as the Eastern Union should be encouraged.^ In ad-. 
dition to the expense that arises from high commissions we have 
also seen that there is a waste in the business produced by too 
great a number of agents and particularly by the appointment of 
agents who are incapable of performing any real economic service. 

The companies show no signs of taking any steps to improve 
this latter condition. The better class of agents, however, through 
their organzations, are moving in this matter, not so much for the 
good of the public as for the sake of better conditions in the busi- 
ness itself ; it has been freely suggested by agents that the State 
should undertake to protect the public from incompetency in this 
field. Certainly if the State finds it desirable to go so far as to 
set up a standard for veterinary surgeons and for plumbers it is rea- 
sonable that it should set up a standard for the agent who, by 
carelessness or incompetence, can invalidate his client's insurance 
or plunge the companies into severe losses. It would seem desira- 
ble that an examination for competency should be provided by 
statute or that the 'Superintendent of Insurance shoiiM be^ em- 
powered to fix standards of competency and license only those who 
are able to comply therewith; furthermore, that a fee should be 
charged. This would help to reduce the niimber of unnecessary 

* Curious to say, however, in some states companies are denied the right 
to combine even on the subject of commissions. 

4: 



98 [Assembly 

agents, particularly if the fee were large. It is doubtful, how- 
ever, whether as a practical matter, the State could go very far in 
this direction without bringing into operation the retaliatory laws of 
ether states to the disadvantage of domestic companies. w 

EXPEI^SE AND EiEE-PeEVENTION. 

One other aspect of the expense problem must be spoken of. 
Attention has already been called to the fact that the tendency in 
insurance is now very strongly toward '^ prevention." In one 
field, steam boiler insurance, this has gone so far that the preven- 
tive work of the companies has become far more important than 
insurance propel. It is so obvious that the blowing up of boilers 
should be prevented rarther than that they should be allowed to 
blow up and the losses distributed that as a matter of fact over 80 
per cent, of the premiums are used for inspection land other preven- 
tive work. 

It ought to be almost equally obvious that fires and deaths should 
be prevented ; we are .accustomed, however, to think of them both 
as inevitable; death is inevitable, to be sure, but not untimely 
death ; we are coming more and more to know that fire and disease 
should both be eradicated. 

'Now in the face of this tendency the question of expense, seri- 
ous as it is now, is a still more serious one to meddle with. For if 
it is really true that the destiny of insurance is to become preven- 
tion, as steam boiler insurance has become, the expense ratio must 
increase instead of diminish, namely by all the expense of inspec- 
tions and other preventive work. Arbitrarily then to limit expense 
would be a very dangerous step for it might discourage this very 
development. 

Brokees. 

The fire insurance business is characterized by its great variety 
of local conditions; the same company often does business very 
diJfferently in different states and even in different parts of the 
same state. It is impossible for instance to treat the broker in fire / 
insurance in a general way ; in one part of the country he is looked 
upon as an unmixed evil and in another part he has made for him- 
self a thoroughly honorable and useful place. 



1^0. 30.] 99 

It is eivideiit that there must be middlemeii between the: ooin- 
pany and the insured. In the country and small city these are the 
local agents; in some of the larger cities also the business is en- 
tirely in the hands of the agents and their paid solicitors, but in 
most of the large cities there has grown up, to a greater or less ex- 
tent, a class of '^ brokers '^ who bring the business of their clients 
to the companies. The agent and the broker are largely comple- 
mentary, that is the presence of one to a degree usually means the 
absence of the other. In I^ew York city for instance business is 
don© almost wholly through brokers and there are but few local 
agents. 

It is impossible in large cities for the insured to come into di- 
rect contact with the company ; whether the middleman is the agent 
(and his p^aid solicitors) or the broker is, in an economic sensie, 
largely a matter of indifference, provided both are efficient — 
that the work of each is real service. 

Fundamentally the broker is one who can control a line of in- 
surance ; he virtually sells it to the company ; his pay is in the form 
of a commission. If this were the whole of the service that the 
broker performed (and in some cases it is hardly more than this) 
his existence would hardly be justified ; at best the only economic 
service that he performed would be the covering of some property 
with insurance which would otherwise be allowed to go unprotected. 

The broker has however in general developed to a point several 
steps in advance of this. Competition for business has forced him 
to find ways to make himself useful. That broker will get the most 
business who can give the most value in return. 

'N'ow, in a large city where the insurable values are large, where 
the conditions are complex, where the rating is done by schedule, 
where enough good insurance is difficult to find, it is not hard for 
the broker to find valuable services that he can acceptably perform. 
They are much the same services which, in the absence of brokers, 
would be performed by agents. He becomes the expert adviser of 
the insured, he inspects his property, he studies his schedule, he 
finds what changes can be made to reduce his rate, he plans these 
changes in de tail, or if the building is still in the hands of the 
architect, he joins with the architect in a study to make it a supe^ 
rior risk, he decides the written part of the policy and the appro- 



100' [Assembly 

priate forms^ lie picks out tlie companies to whom the risk is to be 
given, ho gives legal advice, he attends to adjustments of losses - — 
all of these services and perhaps others are performed by the 
brokers w^ho have the most snccessfullj foimd their place. i 

In all of this the broker is acting as agent for the insured (al- 
though he is paid by the companies). It can hardly be denied that 
one v^ho has fo^und as much work as this to do has justified his 
existence. And there is perhaps a certain advantage in his repre- 
senting the policyholder instead of the company for it is beyond 
question that the man who has large insurable interests needs this 
expert advice. 

But to perform these services requires the employment of a large 
office force and a number of experts, and so, either as cause or 
effect, it has happened that in general it is the larger offices that 
can offer the most capable service. The brokerage '^ evil " has to 
do not with this class but rather with those who are hardly more 
than, solicitors. There are about 7,500' brokers that are certificated 
by the ISTew York Tire Insurance Exchange; of these probably 5 
per cent, do most of the business. Do the remaining 7,000 
perform any really important service for the public ? If not, had 
the majoTity of them not better be eliminated? 

It is not true, to be sure, that the support of these falls entirely 
upon the insurance business, for most of them combine their insur- 
ance with real estate or something else. It is not an easy question 
to dispose of. Even granted that a number of members of a com- 
munity are out of place economically, it is quite another question 
to know the wisdom of whether and how to try to put them right. 
Even if these brokers were eliminated as brokers would they not 
turn up as paid solicitors in the offices and things go on in much 
the same way ? 

However, what has been said about the qualifications of agents 
applies almost as strongly to brokers. This Committee believes 
that it is desirable that the: State should fix a standard of compe- 
tence both for agents and brokers; furthermore;, that a broker 
should be required to pay a license fee to the State. >• 

Brokers occupy a somewhat anomalous position in that they are^ 
agents of the insured and yet are licensed and paid by the com- 
panies. Trouble has often arisen from this fact. The policy- 
holdeir has found himself unprotected because of failure of his 



'No. 30.] 101 

broker to turn over his premiums to tlie company; furthermore, 
it is often impossible in the case of cancellations for the companies 
to obtain return comonisisions from the broker. To correct this 
there have been several proposals; one way to handle this matter 
^voulcl be to require a bond from the broker, another way would 
be to make the broker, as a matter of law, the agent of the com- 
pany. 

At first glance the idea of requiring a bond of the brokers for 
the faithful performance of their duties recommends itself, but 
on a closer examination the question arises, why single out one 
form of occupation and require it to be subjected to restrictions 
of this nature when the State does not require anything of the 
kind in other professions where a license is necessary and where 
the fiduciary element is present to a still greater degree. 

For example the State licenses attorneys-at-law, and it is a 
matter of common knowledge that these men are called upon to 
handle their clients' or principals' money in large amounts. No 
undertaking is required of them that they will be honest before 
the authority is granted them to practice their profession. iSuch 
matters are left to be taken care of by the penal statutes, and the 
committee believe that this is as it should be. If provision is made 
to license the broker and one of the conditions for the granting of 
the license is that he must be trustworthy and if it is made easy 
for such license to be revoked upon its appearing that he has 
ceased to be such, and if his conviction is made possible for any 
form of dishonesty or on proof that he has violated the insurance 
laAv, or even on proof that he is guilty of such sharp practices as 
to make him untrustworthy, it would seem that the object sought 
in the suggested bond requirement had been amplj^ attained. 
• The committee has endeavored to cover this very point in a 
statute which will be submitted and to cover it in such a way as 
to eliminate the dishonest broker without doing violence to the 
principles of good public policy. 

The principle that your eommittee has acted upon in its con- 
clusions is that the State should go no further in the regulation of 
insurance companies than actual conditions seem to demand. 
Free competition should be considered to be the normal basis, in 
general, for business activity. If however it should be demon- 
strated that this condition is leading to grave abuses it would be 



10i2 [Assembly 

the function and duty of tJie State to interfere; it is an open 
question for instance whether the State will not find it necessary 
some time to regulate commissions. 

When however the companies leave the condition of open com- 
petition and form combinations it is recognized that the State may 
rightly take steps to guarantee to the public that this power that 
the companies so gain shall not be abused. The exact attitude of 
the Conunittee on this point has been fully expressed elsewhere in 
this report. ■ y^\^\^\^ 

In its recommendations however, your Coimmittee goes a sitep 
further than to provide merely for puhlicity; it is prepared to 
recommend that combinations of companies should not be allowed 
to exercise a control over brokers. The correctness of this prin- 
cipal is open to argument. The Committee, however, feels very 
strongly that the pledges that are now required by rating organi- 
zations of brokers give to such combinations of companies powers 
which, if they are to be exercised at all, should belong to the State. 
Such pledges now give to the Exchange a life and death power 
over the broker and furthermore make him an important instru- 
ment in carrying out the purposes of tlie combination. It may be 
granted that in general these purposes are good and yet it is 
offensive to one's sense of liberty that this power should be in the 
control of a combination to be exercised not upon tlie agents of the 
companies but upon the agents of the insured. 

It is believed that the good of the business demands combination 
but this combination must not be maintained by a control over a 
non-participating outside element. Whatever powers are necessary 
to secure the proper activity of the broker should be assumed by 
the State. It might be well, hoiwever, that in the exercise of thiis 
power th.e Exchanges should be called upon in an advisory 
capacity. 

Rebates. 

Commissions to brokers are paid out of the premiums by the 
companies. If it is granted that brokers are performing a 
valuable expert service for the insured it would seem natural and 
desirable that they should be paid by the insured for the service 
performed just as lawyers are paid ; of course, it is in the end the 
insured that pays the broker even if as now he pays him in- 
directly through his insurance premiums. It is doubtful, how- 



]N"o. 30.] 10'3 

ever, whetlier the payment of the broker directly by the insured 
could be made to work. Theoretically it would be much better 
for it would stop rebating. In that case every man would pay the 
same price for his insurance (he should, of course, get it for the 
regular price less the regular commission to brokers), but he 
would make his own bargain with his broker. At present the in- 
sured are all on the same terms both >as regards the cost of their 
insurance proper and that part of the premium that goes to the 
broker. The practical consequence of this method of payment is 
that some brokers buy their business by giving rebates. 

Th'at one man should be ^ble to get the service of his broker 
more cheaply than ^another (which is what a rebate amounts to) 
is not wrong; it is purely a competitive condition that in a ma- 
jority of cases would be founded on reason, but that it should be 
accomplished by the passing of a rebate is what is reprehensible. 
In the one case the bargain with the broker is open and straight- 
forward, in the other case it is indirect and underground. 

As a practical matter rebating in any form works badly. It is 
a form of discrimination in which a straightforward man iis at a 
disadvantage. Practically all of the underwriters' organizations 
attempt to prevent rebating; the 'Rew York Fire Insurance Ex- 
change for instance requires from every broker a pledge not to 
rebate, the penalty being the revoking of his license. If such a 
pledge as this is broken, and assertions are freely made that this 
is not uncommon in 'New York, the discrimination is all the more 
marked, for now it is not merely the straightforward against the 
underhanded, but the honorable against the dishonorable. 

If rebating is a really serious evil and if the payment of brokers 
by the insured is impracticable, the matter should be assumed by 
the State and an anti-rebate "law should be passed to govern both 
agents and brokers. While this would not labsolutely cure re- 
bating it would go further than the underwriters themselves can 
go in the matter. 

Limitation of Conflageatiow Liability. 

Since free competition in fire insurance has been shown to have 

produced bad effects both in driving rates too low and in driving 

commissions too high, the question arises whether competition 

produces beneficial results of any kind. There is another induce^- 



104 [Assembly 

ment beside that of price tbat can be. offered to the policy holder 
and that is the quality of the insurance. The actual form of policy 
is stianda,rdized ; this on the whole is nndoubtedly a good thing, 
particnlarly considering the importance of concnrrency, but, in 
passing, attention m^ay be called to the fact that thereby the oppor- 
tunity is lost for the companies to improve the contract by compe- 
tition with each other. Competition here then as well as on rates 
and commissions is limited. 

There remains, however, one direction still open ; the companies 
can compete in strength. The State to be snre here prescribes a 
legal minimnm of strength and companies that are able to come up 
to this standard are called ^^authoTized" companies. But among 
authorized companies there is la vast difference, and while it is not 
the function of the State to call attention to this, it should afford the 
policy holder every opportunity to find it out for himself. This 
the State can do by requiring the companies to make public all im- 
portant facts. It should be plainly understood by the public that an 
'^ authorized " company has not, because it is authorized, been 
stamped with the State's approval beyond the poiut of having 
coimplied with certain minimum requirements. 

In reality in fire insurance the conditions that are required by 
the State regarding capital, surplus and reserve are far from se- 
curing the stability that similar conditions secure for life insur- 
ance companies; this is because of the conflagration hazard. It 
It is possible for a company to write so recklessly in a single city 
or even in a single conflagration district as to make its indemnity 
in case of conflagration worth almost nothing. A comparison of the 
total assets of a company and its total risks is not very significant. 
Far more important is a comparison of its assets with the amount 
it has at risk at points that are subject to confl^agration. 

Theoretically it is within the province of the State to exercise 
some control over this matter. A certain part of the premiums are 
for the conflagration hazard and should be held as a reserve there- 
for; since conflagrations come too infrequently, however, to afford 
an average the size of this reserve should be determined by refer- 
ence to the company's liability in conflagration districts. The so- 
called surplus of a company is in reality conflagration reserve and 
the plan that has just been referred to would recognize this as a 



ISTo. 30.] 105 

liability; that is, it would require this conflagration reserve or 
surplus to be commensurate with the amount at risk in a conflagra- 
tion district instead of, as at present, leaving thc' matter entirely 
open ; or, looked at from another point of view, it would limit the 
writings of a company in a conflagration district, so as to make 
theui bear some given relation to the surplus. 

The objections to this are wholly on the grounds of practica- 
bility. It has been recognized that the conflagration hazard has 
no proper place in insurance, that there isi no machinery in the 
system that will properly take care of it, and, accordingly, it is 
too much to expect that the ordinary principles regarding reserves 
can be strictly adhered to. In practice there are at least two seri- 
ous difliculties ; first, the inability of companies, immediately after 
a serious conflagration, to hold the proper conflagration reserves, 
and, second, the fact that a restriction upon the amount that a 
company could write in a conflagration district would almost cer- 
tainly result in a shortage of insurance. 

The actual facts at present are that companies treat this matter 
in the most widely different ways. Some companies write so care- 
fully that they are within their ability to pay in full in even the 
uiost serious conflagration, while other companies write so reck- 
lessly that in a similar case they could not pay ten cents on the 
dollar. 

The difference partly reflects the different points of view of 
underwriters with regard to the likelihood of conflagrations, but 
it is also true that at one extreme are found very largely the large, 
well established, conservative comp.anies whose theory of under- 
writing contemplates a long, continuous existence and, at the other 
extreme, small, unsubstantial companies which are admittedly 
only gambling on the chance of being completely ruined. Such 
companies in a serious conflagration expect to go under or at any 
rate to be able to settle their claims at a fraction of their face 
value. 

That is, a good deal of the insurance that is bought in large 
cities has practically no value as conflagration indemnity. And 
yet in the case of ordinary fires it gives fairly good protection. 

The actual state of aft'airs in a city like 'New York is that there 
is not enough first-class insurance to meet the demand land 



10i6 [Assembly 

policy-lioldors musit take a certain amount of inferior insurance, 
which will be almo-st valueless in a conflagration, for the sake of 
the protection that it will give in ordinary fires. 

In the face then of this very serious conflagration hazard, and f 
since it is probably impracticable to attempt to bring the com- 
panies to a uniform standa,rd of potential solvency, it is unques- 
tionably desirable that the iState should be able to place before the 
policy-holder the facts upon which he can intelligently make his 
choice of companies. 

For this purpose it is necessary and sufficient for the State to 
require from each company a statement of its amount at risk, 
both gross and net, in the conflagration districts of say the twenty 
largest citiciS in this country, such conflagration districts to be 
designated by the Superintendent after an examination from time 
to time of the conditions in each city. 

The Safeity Fund Law. 

Shortly after the great Chicago fire a law was passed in this 
state, and similar laws in several other states, which was designed 
to meet the situation arising afteir a great confiagration. The in- 
surance condition after a serious conflagration is very critical; 
most of the surplus of even the strongest companies has disap- 
peared, other companies are insolvent or impaired and the possible 
indemnity in case of another serious fire is at a very low point. 
In a consideration of conflagrations it is quite as important to 
think of the subsequent impairment of future indemnity and its 
effect upon credit, as of the claims of the policy-holders who have 
suffered loss. 

It was with this in mind that the so-called ^^ safety-fund " law 
wais passed which in brief allows a company of this istate to set 
aside a fund called a Special Reserve Fund, provided at least as 
much more is set aside for general surplus ; in case of a conflagra- 
tion in which the claims upon the company exceed the amount of 
the capital and general surplus, the company is allowed to hold 
this special reserve fund, together with the unearned piremium i 
reserve, free from the claims of the burned policy-holders, for the 
benefit of the unburned policy-holdeirs. The capital and general 



JSTo. 30.] 107 

surplus go to tlie policy-liolders who liave suffered lossi; tliey get 
this and this only, and have no further recourse to the company. 

The purpose of the law is excellent, namely, to save the com- 
pany's plant, and so to encourage the supply of indemnity in the 
very critical situation that follows a conflagration. To plunge a 
company into insolvency and so destroy its plant is an economic 
loss. The withdrawal of part of the surplus in a special reserve 
fund cannot be criticised in view of the fact that the size of the 
surplus is a matter that, in any case, is at the discretion of the 
company. 

The effect of the law, however, is to turn over the whole of the 
unearned premium reserve to the unburned policy-holders and so 
in effect to make them preferred creditors. The unearned pre- 
mium reserve is to be sure the part of the funds of the company 
that is reserved for the unburned policy-holder's: special benefit, 
and, strictly, the surplus is that part of the funds that is applica- 
ble to conflagration liability, and yet there is considerable to be 
said, in case somebody must lose money, for the greater urgency 
of the claims of the burned policy-holders ; for, whatever the 
claims of equity may be, the moral claims of the burned policy- 
holders are the stronger because of their greater needs. 

A law has been recently passed in Massachusetts which in effect 
denies to the unburned policy-holder the position of preferred 
creditor. 

The whole question is simply another outcropping of the fact 
that the conflagration hazard does not properly belong in insurance 
and cannot be dealt with wholly rationally. It is inevitable that a 
conflagration, even with all the resources of the insurance com- 
panies, should produce serious financial disturbance. 

The safety-fund law is another instance of the numerous fea- 
tures of insurance which must be understood if the policy-holder 
is to be in a position to act intelligently. In effect what must be 
borne in mind is that the effective strength of a siafety-fund com- 
pany in a severe conflagration is its capital and surplus less its 
special reserve. 

There is this to be said, however, that as a practical matter the 
s-afety-fund law would not be taken advantage of except in 'a very 
severe conflagration. It would be only when the companies that 



108 [Assembly 

were not operating under this law were very seriously involved 
that the safety-fund companies could afford, for competitive rea- 
sons, to take advantage of it. Onlj one company took advantage 
of the law in its San Francisco settlements. 

The Regulation of RuItes by Competition. 

So far only one open avenue for competition in fire insurance 
has been noticed. Competition in rates and commissions has been 
closed by combination, competition in policy forms has been 
closed by the standardization of policies. There is only a compe- 
tition in strength and it is seen that, to open the way fully to the 
operation of this form of competition, steps must be taken to let 
the policy-holder see clearly what the strength of the compiany is. 

It has been urged, however, in this report, that competi* 
tion, with the help of publicity, was sufficient to keep rates rea- 
sonable. If this is so competition must still have some power. It 
is true to be sure that perfectly free competition in rates has been 
largely closed, and it is believed that this is unquestionably for the 
public good, but competition can and does regulate rates through 
the medium of the rating organizations. 

If a rate is too high there is pressure brought by the companies 
upon the rating organization to reduce the rate as a basis for se^ 
curing business, that is, there is a competition among the compan- 
ies to obtain the favor of the insured by securing for him a re- 
duction in rate. Furthermore, there is the competition of mutual 
and non-Board compianies (and the threatened competition of other 
companies that will be organized if the rate becomes too high. 

Mutual Insurance. 

It is believed that there is enough competition here to keep 
rates from becoming excessive, but it is important that this bene- 
ficial and regulative form of competition should be retained and 
increased if possible. This can be done, for instance, by opening 
the way to a free competition by the factory mutuals and the mis- 
cellaneous mutuals which have in Massachusetts so well justified 
their existence. Such companies can unquestionably, if they re- 
ceive proper supervision, exert a very wholesome influence in the 



I^o. 30.] 109 

direction of economy and tlie preveiition of fire. There is neither 
the tendency on the one hand to rednce rates below cost nor, on the 
others, to pay exceBsiv^e commissions' — the mill mutualis in fact pay 
no commissions. 

There are dangers in the mntnal system if the organization and 
operation of such companies are not closely watched, but it is ba- 
lieved that this can be provided for. 

An objection to niutnal companies that is often made, and 
made in snch a way as to exalt the stock companies, is that mutual 
companies cannot assume their share of the conflagration hazard, 
and that, therefore, this burden and the burden of other classes 
which the mutuals will not write, is left upon the shoulders of the 
stock companies. 

It is perfectly true that mutual companies cannot in general 
handle the conilagration hazard but it is forcing the matter into the 
field of sentiment to find anything in the situation that is either 
to the discredit of the mutual companies, or to the credit of the 
stock companies. It is simply a statement of fact that the mutual 
system can operate successfully only where there is no conflagra- 
tion hazard, and that if the conflagration hazard is to be assumed 
at all that the stock companies must do it. But this works itself 
out in a purely economic w^ay. It is not to the credit of the stock 
companies to assume a conflagration hazard that is beyond their 
power and that they are not adequately paid for; and if they do 
so it is not due to sentiment, but because they yield to business 
pressure. If there is a field that mutual companies can occupy 
more acceptably than stock companies, even though by doing so 
they take the cream of the business, they should be allowed to oc- 
cupy it. It is not necessary to offer a subsidy to the stock com- 
panies for undertaking the conflagration hazard; if it is under- 
paid let them collect more premiums: 

Factory Mutual Insueance. 
The first so-called Factory Mutual Insurance Company was 
formed in 1835 in Ehode Island and grew out of the fact that the 
stock companies at that time made no concession in rate for fire- 
protective features. The members were mostly owners of woolen 



110 [Assembly 

and cotton mills. iSince that time twenty or more such companies 
have been organized, mostly in Massachusetts, Rhode Island and 
Pennsylvania. They have risks aggregating something over two 
billion dollars. These companies co-operate with each other in the 
distribution of risks and on inspections! ; they are grouped, largely 
according to size, into what are called the Senior Conference and 
the Junior Conference. These companies which began by writing 
mostly woolen and cotton mills have broadened their field to 
factories in general. 

From the very first they have been able to make better"^ rates to 
their members than the stock companies, for they have always in- 
terested themselves in protection and prevention. In 1875 the 
automatic sprinkler was invented. This was unquestionably the 
greatest step that has ever been made in the subject of fire pre- 
vention. The automatic sprinkler consists in a sprinkler-head 
suspended from the ceiling and connected under pressure with a 
source of water; the opening in the head is sealed with a soft 
solder that melts at a comparatively low temperature. These 
sprinklers are scattereid at regular or irregular intervals throughout 
the building which is tO' be protected. When a fire starts thei heat 
melts the iS-older on one or more of the sprinklers in the immediate 
vicinity of the fire, the water is released and is thus autoimatically 
applied at the p-oint where it is most needed. The^ result is that in 
a very large proportion of cases the fire is extinguished, often in 
the absence of any person, before it has done much damage. The 
great value of the sprinkler lies in the fact that it is automatic, 
ever-ready and applies the water at the exact spot where it is most 
needed. 

The sprinkler soon after its invention was investigated by Mr. 
Edward Atkinson, who at that time, as president of the Boston 
Manufacturers' Mutual Fire Insurance Company, and until his 
death was the most untiring advocate of fire prevention. The in- 
troduction of the sprinkler was slow, owing to the fact that it was 
largely untried, that the cost of installation was large and that its 
use was discouraged by the stock companies. It was not long, 



* The stock companies now, throiigli the Factory Insurance Association 
practically meet the rates o£ the mntnal companies. 



'No, 30.] Ill 

however, before the sprinkler demonstrated its value, and to-day a 
sprinkler equipment is in general required before a factory mu- 
I tual company will go on a risk. The work of the factory mu- 
tuals consists very largely in standardization and inspection, the 
emphasis being on the prevention of loss rather than on insurance 
proper. The first step that is taken by a mutual company on re- 
ceiving an application for insurance is to make a thorough sur- 
vey of the property and to draw up a detailed plan for changes in 
construction, the installation of a sprinkler equipment or a pump- 
ing station or such other features as may be thought necessary by 
the company before they will accept a risk. When the risk is ac- 
cepted the insurance is apportioned among the different companies 
largely in proportion to their size. 

The companies unite in a very thorough inspection work. Every 
factory is carefully examined by experts at least four times a year 
and the results, with suggestions for improvement, are sent both 
to the companies and to the owner. If the inspections show con- 
tinued poor conditions, the insurance is cancelled. The results of 
this system are little short of marvelous. Factories are, of course, 
in themselves one of the most hazardous classes. The rate of the 
stock companies on woolen mills, when the first factory mutual 
company wais organized, was between one and two dollars a hun- 
dred. The net rate now in the best mutual companies is about 
four cents. 

It is impossible to go further into the details of this most inter- 
esting work. But it should be clearly recognized that to the mill 
mutuals belongs most of the credit for the inception of what is 
being done to-day toward the prevention of fi]'e. The stock com- 
panies iare now thoroughly committed to this work themselves, but 
they have been largely driven into it by the competition and ex- 
ample of the factory mutuals. 

The premium plan of these companies is as follows : risks are 
graded by percentages, that is, tlie rate is seventy cents, eighty cents 
or some other multiple of five ; as a matter of fact, the standard- 
ization is so complete that there are no great differences in rate. 
The laverage rate in the larger companies is about seventy-five 
cents ; this premium is paid at the beginning of the year ; at the 



112 [Assembly 

end of the year the part of the premium that has not been used is 
returned. This return premium is based upon the experience of 
the company on the whole of its business. For some years it has ^ 
remained very steadily near 94 per cent. 

Beside this gross premium, only 6 per cent, of which is in gen- 
eral necessary, the policy-holders bind themselves to pay an assess- 
ment, if necessary, of five times the gross premiums. 'No company 
in the last sixty years has found it necessary to call for an as- 
sesisment. This in itself is very good evidence of the strength of 
the factory mutual isystem. 

In a statistical analysis the ratio of assets to amount at risk 
conies out somewhat smaller for the largest mutual companies than 
for the largest stock companies, not including, however, in the 
assets of the mutual companies the potential strength of the assess- 
m.ent ; but the risks of the stock companies are so much more haz- 
ardous than those of the mutual companies that the ratio of assets 
to losses is thirteen times as great for the mutual companies as for 
the stock companies. Considering in addition the fact that the 
factory mutual companies do not write where there is a serious 
conflagration hazard, it would seem as though they were abun- 
dantly strong. 

It has already been said that the competition of the factory mu- 
tuals has been largely met by the stock companies through the 
medium of the FactoTy Insurance Association. Stock insurance 
appeals more strongly to some owners of factories, particularly 
those who wish to be entirely relieved of the possibility of assess- 
ment and those who would be embarrassed by maintaining so large 
a deposit. The stock companies offer on such risks the same rate 
as the net rate of the mutual companies when the interest is taken 
into account on the amount on deposit ; for example : 

Gross mutual rate $0 76 

Eeturn premiuan (94 per cent.) -^05 

E'et rate 045 £ 

Add 4 per cent, interest on the gross premium on de- 
posit -03 

Effective mutual rate .075 



1^0. 30.] 113 

The expeiis© of doing the business of factory mutual insurance 
is much less than the cost of doing the business in stock insurance. 
Stock insurance costs about forty cents per $100 of insurance writ- 
ten, and factory mutual iuisurance about four cents'^ per $100 of 
insurance written. 

The expense ratio for factory mutual insurance is, however, 
greater, when figured on the net premium than for stock companies ; 
more money is spent on expense than on losses. This is natural 
and right; it shows only the emphasis that is being put upon the 
protective side of the business. 

These companies are not admitted to do business in this state, 
but the fact is that they issue policies covering property located 
therein in enormous amounts in the aggregate. This they do by 
writing the policies and issuing them at their home offices in 
their home states and mailing them to the policy-holder whose 
property is insured. In this way they avoid sections 19 and 50 
of the Insurance Law by making the contract in the foreign juris- 
diction where the 'New York statute does not and cannot apply. 

It is quite apparent, however, that as the term ^' agent " is 
defined in section 49 of the law that the inspectors and surveyors 
of such companies violate the law, because when they, in the 
course of their duties, inspect or survey a plant before the insur- 
ance is written, or after it is written, with the purpose of inform- 
ing the company, of the character and condition of the risk, they 
fall within the definition as a ^ ^surveyor or any other person 
who shall in any manneir aid in transiacting the insurance busi- 
ness," in which the company is engaged. Ofilcers of the stock com- 
panies also freely assert that the competition between themselves 
and these factory mutuals is severe as the good risks of the kind 
which the mutuals will take are actively and persistently solicited. 
ISTor do the officers of the mutuals strenuously deny the allegation. 

The reason for the situation is easily discerned for it is ap- 
parent that the law could be rigidly enforced only by keeping a 
large force of detectives at work to shadow the inspectors and 
survevors. As the insurance furnished is of the best and as the 



* It is only fair to say however that the Factory Insurance Association has 
re<-luce(l its expense to about the same figure. 



114 [Assembly 

f ac'tory-ownerB in the istate want the insurance, tbeTe is no public 
sentiment in favor of the enforcement of the law and so it re- 
mains practically a dead letter. One result of this is that the 
state is losing revenue, for the reason that when insurance is 
placed with these companies, the stock companies which pay taxes 
tO' the state los'e the business; the state moreover is losing the 
wholesome effect of legalized competition. 

Officers of the factory mutuals have testified hefo<re the Com- 
mittee in behalf of the companies they represent and in behalf of 
the other mutuals that if it were not for the inconvenience which 
the present law would subject them to they would apply to the 
Superintendent of Insurance for a certificate of authority. 

Objection is made to the present requirement of the law as to 
a deposit in the home state of at least $20i0y0'0'0i, on the ground 
that since the companies are mutual, such a tying-up of funds is 
opposed to the theory of insurance upon which they are working. 
Further that the provisions of the present law requiring the pre- 
miums by fire districts are onerous. 

The Committee believes that every reasonable effort should be 
made to induce these comp'anies to enter the state of 'New York, as 
duly authorized companies and that therefore the law should 
be so amended as to attract them to come here and pay to this 
state the taxes they now pay to their home states on the business 
done here.. Furthermore, it is believed that the state itself is 
more in need of additional revenue at the present time than the 
Volunteer Fire Departments, so that the tax should not be given 
wholly to such organizations as the present law provides. The 
fact is that the risks incurred by these companies are the least 
likely to bum because of the pTecaiitionary measures which are 
taken to protect them, so that the work of the fire departments is 
not increased by the presence of such risks. It seems to the 
■Committee that a fair way to dispose of this question and to do 
equity to the volunteer firemen is to provide that 10 per cent, 
shall go tO' the Firemen's Home at Hudson, and that the 
balance shall go directly into the state treasury. As it is now 
neither the firemen nor their home at Hudson nor the state receives 
any tax. It is much better for the state and Home to get it than 
to have it go to foreign states. 



E'o. 30.] 115 

The Miscellaneous Mutuals. 

Beside the mill loiitiials there is a class of companies which do 
■a miscellaneous, but largely dwelling-hoiise biisiinesis. These are. 
often called the misoellaneons mutuals. 'New England and par- 
ticularly Massachusetts has been the part of the country which has 
taken most kindly to this form of insurance, and here many such 
companies have had a long and honorable life. In general these 
cO'mpanies collect a premium from one to one and a half times as 
large as the premium of the stock companies on the same class of 
business, but at the expiration of the policy they return part of the 
premium; this brings the price of the mutual insurance down in 
general to about 75 per cent, of the stock premium. The policy- 
holders under this contract are liable for an extra assessment 
equal to the full premium already subscribed. 

These companies write conservatively in large cities. A nimiber 
of the companies were involved dn the Boston fire in 1871 and 
went through the experience much more creditably than the local 
stock companies. 

The expense ratio of the miscellaneous companies is in general 
about 5 per cent, less than that of the stock companies. 

A number of these companies desire to broaden their field of 
operation so that they may obtain a larger basis of average in case 
of conflagration. Under proper restrictions, they should be en- 
couraged to enter. 

Lloyds. 

The Lloyds are associations of individual underwriters. The 
name covers organizations of all degrees of looseness or closeness 
of association and all degrees of responsibility. The experience 
with organizations which went under the name of Lloyds in this 
staite has been so unfortuniate that in 1892 a law was passed pro- 
hibiting the formation of new associations and in 1910 the Lloyds 
were brought more closely under the control of the Insurance De- 
partment. The Lloyds which are authorized in this state transact 
^business in much the same way as the stock companies. 

There are besides these, however, a number of foreign 
Lloyds. These are not allowed to employ agents in this state to 
solicit business. It is stated, however, that much business finds 
its way abroad and that the foreign Lloyds write much insurance 



116 [Assembly 

in this market and mncli bitter complaint has been made to your 
Committee because of this fact. 

It is very difficult to see just bow the State can prevent its# 
citizens, if tbey will, from making a contract in a foreign state ' 
or land concerning their property wherever it may be. The 
government that gives mercantile and other organizations their 
life might compel them to buy insurance only in this state; the 
wisdom of even that limitation could be questioned, but it is 
quite certain that the State cannot — and observe the Constitution, 
• — prevent its citizens from making contracts where they will — • 
and of course, the procuring of insurance is the miaking of a 
contract. 

The Insurance Law now prohibits these foreign Lloyds from 
writing business in this state; it alsio prohibits any unauthorized 
corporation from so doing. 

The law now makes provisions for the procuring of surplus line 
insurance when the same cannot be placed with the authorized 
companies. An agent is licensed especially to procure this insur- 
ance as the agent of the insured. He can place this where he 
will, provided ho and the insured make affidavit that it could not 
be procured with authorized coanpanies. The statement is made 
that a good deal of insurance, not surplus line, goes to foreigTi 
co'mpanies and Lloyds. The remedy for presenit evils is tO' enforce 
the laws already on the books. The Committee fails to siee how 
more law on the subject can help the situation. 

There seems to be confusion as to whether the licensed agent 
can issue or countersign policies for the unauthorized company in 
these pure surplus line cases. It is claimed that companies are 
actually and in violation of law issuing such insurance from offices 
located in ^ew York state. The app^arent intent of the law is | 
to permit the issuance of surplus line policies in this state in the 
speicial cases mentioned. 

The Committee believes the matter should be made perfectly 
clear by an amendment to the licensed agents' section, so that; this-v 
surplus line insurance could be written by such agents in thi* > 
state. Then it may be easier to enforce the other prohibitory 
sections of the law, as no one not licensed' could have even the 
shadow of an excuse for writing any kind of insurance without 
an express certificate of authority. 



:N"o. 30.] 117 

Inter-Insurance Associations. 

A plan of insurance which in many respects resembles that of 
the mill mntnals, and in some particnlars that of the Lloyds^ is 
furnished by what are called inter-insurance associations or 
simply inter-insurers. 

These are groups of individuals who act to insure each other, 
that is, they act both as insurer and insured. There are now 
recognized in this state three of such organizationiS' but there are 
many more in the country at large. The class of property for 
which the system was originated and in which the: insurance is 
mainly done is the class of mercantile buildings and stocks. 

It is very difficult to procure enough insurance in large cities 
on the class of mercantile stocks. This led to the banding together 
of a few meirchants to insure each other; the lassociation 
grew until it embraced seveiral hundred merchants in a large 
numbeT of cities. Each member of the group who wishes to 
have his own risk insured must bind himself as an insurer up to 
a certain fixed limit. Each subscriber is pnt upon each risk that 
is written after he enters the association and he is debited and 
credited with his earnings and losses on each risk. The stock 
premiums are charged and the earnings amount to a return of a 
part of the premium. The return is very properly not exactly 
propoTtional to the premiums as it is in the case of the mill 
mutualsi. 

In general, inter-insurance associations confine themselves to 
high-grade, well-equipped, sprinkleTed risks and maintain an in- 
spection department of much the same character as the mill mutu- 
als. This form of insurance is certainly very successful under 
ordinary conditions but there is soiuei question how successfully 
such associations could stand the strain of a severe conflagration. 

The door is at present shut to those who would organize more 
of these associations as well as to responsible foreign associations 
of this character that wish to do' business here. Your Committee 
believes that under proper restrictions, there is no reason why 
persons who desire to enter the insurance business, either as 
members of Lloyds, or as inter-insurers, associated with others, 
similarly obligated, should not be permitted to do so'. Further, 
the evidence shows that there are individuals so associated in 



118 [AsSIiMBLY 

busiiiCiss, domiciled in other stuiteis, wlioiso sirengtli is uiiquestioned 
and who have accnmiilated not only an nnoarned promium reserve 
upon business done by them elsewhere, but have a guarantee fund 
deposited in addition to the individual liability of each of the^ 
underwr iters; your Committee believes that such responsible 
bodies should be permitted to do business in this state under 
proper restrictions and that their presence here would aid the 
general public in securing safe insurance at proper rates. 

Domestic Mutuals. 

Mutual companies may be organized in this state under the 
present law, which, however, has not to any considerable extent 
been taken advantage of; nor has your Committee's attention been 
called to any extended demand for a revision of this law. The 
only evidence on this subject before your Committee was from a 
witness who advocated a change in the law which seemed more 
in the interest of promoters of companies than for the good of 
the public. 

The state has already provided in article 9 of the Insurance 
Law an excellent system of mutual insurance for the smaller towns 
and communities where the conflagration hazard is substantially 
absent. These county and town co-operative companies have 
just recently (1910) been brought within the purview of the In- 
sairance Department and tiheir powers and duties have been care- 
fully defined, and it is to be expected that under careful super- 
vision the usefulness of these organizations will increase. 

What seemed a hardship on one of these companies whose rec- 
ord is excellent was brought to the attention of the Conimittee. 
The operation of the new statute will have the effect of making it 
reduce its insurance in a line (mercantile and country hotel 
risks) where its experience has been very favorable. A recom- 
mendation for amendment to the law was suggested by this com- 
pany so that the insurance issued by it and others in a similar 
situation prior to 1910 could be continued. Inasmuch as it is- 
sued no policy in excess of $4,000, even in the line prohibited, ^Jj 
the Committee believes the exception can safely be made and not 
impair the efficiency of the law or endanger the class of com- 
panies to which it belongs. 



Ko. 30.] 110 

EijRE Prevbntiow^. 

Important as it is to have equitable rates in fire insurance and 
important as it is that the expense of the business should be kept 
within reasonable limits, so far as practical results are concerned, 
the problem of fire-waste is immensely more important. On 
the whole, rates in fire insurance are fairly equitable, probably 
more so than railroad rates, for instance, and the tendency is 
strongly toward still greater equity. So far as expense is con- 
cerned it is impossible to be very hopeful of much reduction; no 
one believes that it could be more than a few million dollar.^ a 
year. Against that we have the certainty that the fire-loss could 
be at least cut in two, that there could not only be a saving of 
$100,000,000 a year in property now destroyed, but nearly as 
much more in insurance expense, certainly hundreds, perhaps 
thousands of lives saved and a world of worry and suffering. 

The fire-loss of this country averages nearly two hundred and 
fifty millions a year and is increasing; this is about $30,000 an 
hour or $500 a minute, year in and year out. To this must be 
added at least the same additional amount for the maintenance 
of fire departments and nearly as much more for the expense of 
conducting the insurance business; altogether in the neighbor- 
hood of $750,000,000 a year of expenditure because of destructive 
fires. That is, fire costs us directly and indirectly each year more 
than the value of the coitton crop, land not only that but along with 
this economic loss goes a frightful and horrible loss of life. 

All this would not be so bad if it were not so preventable. In 
Europe the per capita loss is only one-seventh of what it is in this 
country and in some parts of Europe far less than that. It is 
stated that in the city of Vienna a fire has never been known to 
get beyond the building in which it originated, and this is in spite 
of the fact that the fire departments of European cities are far 
less efficient than those of this country. 

The cause for this is partly climatic ; not only do our hot sum- 
mers make everything as dry as tinder, but our cold winters ne- 
cessitate artificial heat, and heating apparatus alone is responsible 
for a large proportion of all fires. A still more fundamental cause 
for this difference lies, however, in the temperament of the Ameri- 
can people and the conditions of life in this country. 



120 [Assembly 

This is a new and largely undeveloped country, and the re- 
sources have seemed illimitable. In our eagerness to reach re- 
sults we have not had the patience to Luild carefully ; so plentiful 
was lumber that it was easier to build and burn and build again ^ 
than to build substantially at first. Besides that conditions have ^ 
changed so rapidly that often in a few years buildings must needs 
be torn down that their places may be taken by others more suit- 
able to changed conditions. Then, explain it as you will, the in- 
tensity of life is far greater in this country than in Europe, more 
living is crowded into the same time. But you cannot accelerate 
processes without increasing hazard; we have no time to see that 
matches are out, everything is run under forced draught. The 
fire loss is only one indication of the wastefulness of our life ; we 
have wasted our forests, our soil, our mines, our water. 

There are various indications, however, that we are coming to 
the time when we must stop this prodigal waste. The drain upon 
our resources is beginning to show itself in the increased cost of 
living. 

It is impossible to spend directly and indirectly on the luxury 
of fires each year the amount of $750,OiOO,000 and not have to 
give up other luxuries; it is impossible to employ 500,000 men, 
repreisenting a population equal to that of Chicago, in building, 
in insurance, in fire departments, who might otherwise be creat- 
ing wealth, and not feel the strain of their support. 

The movement for conservation is becoming stronger every day 
and will continue to do so as the need increases and the people 
realize more thoroughly the enormity of what they are doing. In 
the case of fire the matter is so perfectly possible of control! 
Even with our present poor construction the fire-waste could be 
enormously reduced by such simple means as the clearing up of 
rubbish, the use of safety matches, reasonable care with heating 
apparatus, the proper disposition of ashes. 

It is too much to expect a whole people suddenly to amend its 
life and pay attention to these things, but the cost of an inspection 
service which would compel some of these simple precautions 
would be trifling compared with the good it would do ; it has been § 
suggested that the employees of the fire department could be util- 
ized in such work and so become still more familiar with local 
conditions. 



No. 30.] 121 

But when we turn now to larger matters, better construction 
and equipment, we are met by the astonishing fact that the cost 
"jof such changes bears no comparison with the saving that would 
be effected. The equipment that the factory mutuals demand is 
most elaborate — often a private pumping station, large private 
water mains, water tanks, iire-stops, sprinkler equipment, auto- 
matic alarms — and yet it is the common experience that the cost 
of all these will be made up in two or three years' savings in pre- 
miums. An investment that would be replaced by three years' 
premiums has an earning power of 50 per cent, per year. Even 
if it took five years' savings on premiums to pay for increased cost 
of construction and equipment, such investment would be yielding 
25 per cent, and similarly an expense that took ten years to re- 
place would be earning 11 per cent. That is, a man who refuses 
to spend $1,000' on better construction or equipment when he could 
thereby save $200 a year on his insurance premiums is refusing 
an investment that would pay (that is save) him 25 per cent, a 
year. 

That is, the saving in insurance premiums alone will yield a 
large earning on the cost of better construction and equipment, but 
to this must be added all the advantages that are attendant upon 
uninterrupted conditions, the saving in worry, the greater safety 
of life, the greater stability of economic conditions. 

The accomplishments in this line are most spectacular in the 
case of factory mutuals land the factory insurance associationis. 
Manufacturers are keen students of expense and efficiency and if 
fire prevention has appealed to them as a good investment the 
public may well follow their lead. 

Good construction is the basis for fire prevention; but new 
buildings form only a small part of a city and it is years before 
their effect will be greatly felt. To a city as a whole, therefore, 
good construction avails mostly for the future. 

The conflagration hazard in 'New York is due mostly to the 
*%thousands of old buildings, built in the days when neither steam 
nor electricity nor gas were important features of the hazard. 
They are not adapted to modern conditions. There are then a 
great number of buildings that will burn if a fire starts and the 
practical problem is either to prevent the fire from starting or to 
prevent it from getting a headway. Here is one field for the 



122 [Assembly 

automatic sprinkler. Its use should unquestionably be extended. 
It is even desirable that the installation of sprinklers in certain 
classes of buildings, in basements perhaps, in schoolhouses, in g 
crowded city factories should be made compulsory. ^ 

There will always be a fire hazard on stocks of merchandise, and 
in general on contents of buildings, however good the buildings 
themselves are. Here also, therefore, the automatic sprinkler has 
a tremendous field of usefulness. 

The most hopeful lines along which this problem of waste may 
be attacked are first, the awakening of people to a sense of the 
waste and shame and horror of fire, and an education in what 
should be done to improve conditions. A number of fire marshals 
in different states have undertaken this work of education; some 
good literature of this kind has been issued in Ohio, for instance ; 
in Nebraska one day a year is set aside in the schools as fire day, 
on which the pupils receive special instruction and demonstration 
concerning fire, and a text-book has been prepared for use in the 
schools of the state. 

The National Board of Fire Underwriters and the National 
Tire Protection Association are both engaged in educational work 
and will be glad to co-operate with individuals or associations or 
committees who wish to give this matter attention. 

The second way to work for improved conditions is through the 
creation of the office of Fire Marshal. It should be the duty of the 
fire marshal to investigate and make a record of every fire, and 
this record should include the cause of the fire, in order that it 
may serve as a basis for a study of the fire hazard. 

It would be desirable (but poissibly at present impracticable) 
if every pierson upon whoise premises a fire starts should be re- 
quired to go on his own initiative and report the fire and the 
circumstances to the fire marshal. This in itself would go far to 
reduce the number of incendiary fires. The fire marshal should 
also maintain an inspection bureau whose duty it should be to 
see that premises were kept in good order and that in general 
strict fire preventive conditions were maintained. It might well f s, 
be provided further that no insurance company should pay a loss 
until authorized by the fire marshal, or at any rate that the fir© 
marshal should have the right to order payment stopped in sus- 
picious cases pending an investigation. 



■^ 



'No. 30.] 123 

A third method of improving conditions is through better build- 
ing laws. The importance of fire-prevention, even from a purely 
financial point of view, should be brought to the attention of 
municipal officers, and a stringent building code enacted. This 
should not only be done by citieis but by states as well. 

Several years ago a Model Building' Code was prepared by the 
^'ational Board of Fire Underwriters and sent out to city officials 
iill over the country. A number of cities have adopted this code 
in full or in part. A new edition is being printed and the l!^ational 
Board has made plans to give expert advice to those who wish to 
interest themselves in this matter. 

Othee Matters. 

Evidence was presented to the Committee against a large cor- 
poration, whose principal business is the loaning of money on bond 
and mortgage, to the effect that in making its contracts to loan 
money on buildings it refused to accept insurance as an additional 
collateral to the mortgage with those certain fire companies, no 
uiatter how good their financial stability, which refused to pur- 
chase bonds of another corporation closely allied with the one in 
question. While this practice does not commend itself to the Com- 
mittee as being altogether admirable or particularly broad-gauged, 
still it cannot conclude that it evidenced any inherent vice. A 
man or a corporation in the business of loaning money on bond 
and mortgage should continue to have the right to name his 
collateral, and to state the conditions under which the loan will 
be made or continued. 

It would be dangerous intermeddling with business affairs to 
attempt to lay down in a statute what collateral should be accepted 
by the lender. If any illegal conspiracy exists between corpora- 
tions or individuals to injure another corporation or person the 
law now provides ample relief. The evidence, however, does not 
convince your Committee that legislation to prevent the alleged 
acts of the corporation in question is desirable. 



124 [Assembly 



PART III. 

Recommendations. m 

The foregoing discussion has outlined in detail the Committee's 
views upon the many branches of this important subject. Its con- 
clusions have been stated in general terms. It now remains to 
state specificallj what is recommended to the Legislature for 
action. Your Committee realizes fully that there will always be 
conflicting views on what ought to be done in reference to a sub- 
ject so vast and so full of vital interest to the people, and con- 
cerning which there are so many complications. With an en- 
deavor, however, to act in a spirit of absolute fairness to all par- 
ties in interest, having in mind on the one hand that the large and 
substantial organizations which have been furnishing indemnity 
to the public are entitled to have their case weighed conservatively, 
and on the other hand that the people who pay the premiums are 
entitled to equal consideration, the Committee recommends on 
the various questions involved in this inquiry, as follows: 

Valued Policy. 

As to a valued policy law: that the Legislature resolutely re- 
fuse to conntenance this species of insurance heresy. In princi- 
ple it violates the fundamental idea of insurance — indemnity, it 
tends to place a premium on arson and unnecessarily puts temp- 
tation in the way of the insured when prosperity fails. E^owhere 
does such a law seem to have any good effect and the consensus of 
opinion among insurance men and laymen is that it is dangerous 
legislation. 

Coinsurance. 

Yonr Committee recognizes the coinsurance clause as a valu- 
able basis for equitable rating and recommends that its use be 
permitted. Your Committee recommends to the companies that 
they use all means in their power when a coinsurance clause is 
attached to a policy to make clear to the insured, first, that his^ 
policy contains such a provision, and, second, what it means. " 

Anti-compact and Rating Exchanges. 
As to the so-called anti-compact law: for the many reasons 
given, your Committee believes that it would be most unfortunate 



N"o. 30.] 12.5 

for the public if a condition of open competition in rates were 
forced bj the State. The safe policy to follow in treating this 
subject is to recognize the good which flows from combination 
well regulated ; to permit the companies to use rating assoeiations 
and bureaus to develop the principle of schedule rating and to 
spread the cost of determining proper rates among the companies, 
and to permit them to agree to maintain those rates. 

It is therefore recommended that no anti-compact bill be passed, 
but that in place thereof a statute be enacted that will permit 
combination under State regulation, such regulation to stop short 
of actually fixing the price at which the companies shall sell their 
insurance, but T\^hich shall be of such a positive nature that all 
forms of discrimination in rates will cease; such statute to pro- 
vide for the filing by such associations and bureaus of all sched- 
ules and specific rates with the Insurance Department, and also 
that all such associations and bureaus shall be subject to the 
closest supervision by the Superintendent of Insurance, and fur- 
ther that all such associations and bureaus shall keep careful 
records of their proceedings, and provide for the hearing of 
interested property-owners who feel aggrieved at the rates 
charged, — all to the end that the potent power of publicity may 
operate freely to cure any arbitrary action or indefensible 
methods. 

And such statute should also provide that while companies may 
maintain proper rate-making associations and exchanges and 
agree to maintain the rates so made, they must not seek to 
strengthen their own agreement by forcing third persons to help 
them do so. 

In other words the licensing of and control over brokers should 
cease, and the present situation wherein rate-making exchanges 
and associations wield a power which properly belongs to govern- 
ment should be ended. As before indicated, the Committee's judg- 
ment is that the companies have made out a case to justify their 
joint action in the making of rates, but they have not shown that 
they should be permitted to coerce a large body of several thou- 
sand men, who are making their living by bringing business to 
the companies, into helping to maintain rates for the companies. 

The comp'anies should depend upon their own business integ- 
rity in the carrying out of their agreement. They should not be 



126 [Assembly 

2:)erniitted to remove teniptation from themselves and shift the re- 
sponsibility of maintaining rates to the shoulders of men who 
have had nothing to do with making them. The good which flows 
from the conditions that the exchanges now demand of the brokers ■[ 
concerning the giving of rebates can be preserved in a statute on 
that subject. 

State License Law. 

Inasmuch as one important reason for the licensing of brokers 
by the companies was to exclude untrustworthy persons from the 
fire insurance field, it is deemed desirable that such legislation be 
enacted as will carry out this idea; that no person shall be per- 
mitted to sell or to procure fire insurance, either as an agent or 
broker, until he shall have a certificate from the state of 'New 
York giving him the proper authority so to do. 

The state has already successfully dealt with this subject as it 
affects life insurance and the Committee believes that a sub- 
stantially similar statute should be enacted to govern similar con- 
ditions, in fire insurance. Therefore it is recommended that a law 
be passed placing with the Superintendent of Insurance the re- 
sponsibility and the duty of issuing certificates of authority to 
those persons who are trustworthy and competent to transact this 
business, and providing that such certificates of authority when 
issued shall be revoked upon its appearing t.o the Superintendent 
that the holders thereof have violated the law or have become un- 
trustworthy, or have demonstrated their incompetency. 

As to the suggestion which has been frequently made that agents 
and brokers should be licensed only after an examination in which 
they have demonstrated their fitness, the Committee feels that 
such a system would necessarily involve the creation of new 
ofiices, or at least of a board of State examiners, at considerable 
expense, and that therefore the whole matter could better be left 
with the Superintiendent of Insurance to work out, giving him a 
wide discretion, which will allow him to use all means to gain 
knowledge about applicants for certificates which are available to 
him or his corps of assistants. If he determines that a con- J 
venient way to determine competency is by a written examination 
his Department examiners may prepare and conduct such ex- 
amination as may be necessary. 



ISTo. 30.] 12-7 

Anti-Rebate Law. 

Along witii an act pertaining to the licensing of agents and 
brokers, and as a proper restriction upon the manner in whicli 
Psucli persons should conduct the business of fire insurance, should 
be enacted a law which prevents rebating in all its forms, — this 
for the reason that rebates in any form unsettle the business and 
lead to unfair discrimination between individuals. 

CoNFLAaEATIO'N HaZAED. 

Your Committee is not prepared to recommend that the State 
interfere with the companies in the conduct of their business to 
the extent of fixing the limit of insurance which can be written 
by the various companies in districts in which insurable values are 
congested. It does feel, however, that the insuring public is en- 
titled to full and exact knowledge on the subject which will throw 
light upon the conditions of the various companies and the manner 
in which their underwriting is carried on. Therefore, it recom- 
mends, in addition to the information now set forth to the Super- 
intendent of Insurance in the annual statement of companies, that 
the amounts at risk in the congested value districts in large cities 
be shown therein and be mad© a matter of public record. 

In fairness to the companies, however, the law should permit 
them to state how much of such contingent liability is reinsured 
in other authorized companies and how much in unauthorized 
companies. The duty of fixing the boundaries of the congested 
value districts should be left by the statute with the ^Superintend- 
ent of Insurance so that he can upon conference with the under- 
writers determine the question fairly and from time to time make 
such changes therein as may prove necessary. 

Mutual Companies. 

It seems highly desirable that as many solvent, well-organized 
and well-oonducted companies should be admittdd to this state 
as desire to do business here. The more responsible companies 
Jthere are to do such business the better will the fire loss be dis- 
tributed and the more equitable will rates become. It is recom- 
mended that the law pertaining to the admission of mutual com- 
panies of other .states be sio a,mended as to make posisible the ad- 
mission, always subject to the approval of the Superintendent of 



128 [Assembly 

Insurance; of suoli organizations as the E'ew England Factory 
Mutual Companies, and also a la;rge number of miscellaneous 
mutual companies of other states of proven worth ; this can be 
done by remo'ving the requirement of the law as to a deposit in th^ 
home istate. ^ 

To insure the entry of responsible companies only, however, 
such law should require any mutual company which desired ad- 
mission to comply with certain specific conditions that would 
guarantee solvency. 

Lloyds and Intee-Iwsurelbs. 
For the reasons already expressed your Committee believes 
that the organization of more responsible Lloyds and inter-insur- 
ance associations would be for the benefit of the insuring public. 
Therefore it recommends that the law be amended by the insertion 
of two new sections in article 10 of the Insurance Law which shall 
provide for the organization and supervision of such associations, 
requiring in addition to the unearned premium fund on all policies 
in force that each such association hereafter formed be possessed 
of a guaranty fund of at least $200,000 over and above all lia- 
bilities. Such a law while permitting new Lloyds and inter-insur- 
ance associations to be organized, will adequately protect the pub- 
lic in its dealings with them. It also recommends that the law 
be so amended as to permit the admission into this State of such 
thoroughly responsible Lloyds and inter-insurance associations of 
other states as may be, under proper restrictions, authorized by 
the 'Superintendent of Insurance. 

Standard Policy. 
'No change in the standard form of fire insurance policy is 
recommended. On account, however, of the expressed desire upon 
the part of a number of companies to change some of the pro- 
visions, agreements and conditions which are now permitted to be 
indorsed upon such policies, it seems desirable that such changes 
should be made as are in the interests of the insured and as m?j^^,^ 1 
meet the approval of the iSuperintendent of Insurance. Ther" v * 
fore, it is recommended that the companies be permitted during 
the current year to submit to the Superintendent for his approval 
such changes in these conditions as they may wish to make. 



ISTo. 30.] 129 

Amendments Affecting County and Town Co-opekative 

Insueance 'Companies. 

^. It is recommended that an amendment be made to the Insur- 

^ ance Law permitting snch companies as were insuring mercantile, 

manufacturing and country hotel risks prior to July 1, 1910, 

when article 9 of the Insurance Law took effect to continue the 

writing of such risks in amounts not exceeding, $1,000. 

Surplus Lines. 

It is recommended that section 137 of the Insurance Law be 
amended so as to permit agents now licensed under that section 
of the law to issue and countersign policies of insurance to cover 
only surplus line risks, providing that such policies contain a 
provision that the agent issuing the policy shall be the agent upon 
whom service of process in this state can be made. The law, how- 
ever, should not be changed so as to prevent such a licensed agent 
from 'procuring surplus line insurance as he may now do under 
the provisions of the section. The amendment should relate only 
to the issuing and countersigning of policies within this State. 

State Fiee Marshal Law. 
Your Committee believes that at the root of the whole question 
of fire insurance is the consider-ation of fire prevention and that all 
means possible should be taken by the State to prevent fire waste. 
Therefore, it recommends the enactment of a State Fire Marshal 
Law to the end that better conditions may prevail. Such a 
statute has been prepared and it has been the aim of your Com- 
mittee to embody therein the strongest points of similar laws of 
other states, as well as such additional suggestions which seemed 
of value as have been made in the course of the inquiry. 

C1.ASSIFICAT10N OF Loss Experience. 

In view of the apparent difficulty which would attend the 

s classification of the loss experience of the various companies if 

-^''each state required the clasisification to be kept differently for 

each, it is not recommended that companies at present be required 

to keep and report their loss experience according to a common 



1'30 [Assembly 

plan. Your Committee believes, however, that if the companies 
and the various Commissioners of Insurance of the different states 
should agree upon such a common plan which all companies doing | 
business in this country could and would follow, that a great step 
toward reducing the business to a scientific basis would have been 
taken. It therefore recommends to the Superintendent of Insur- 
amce that he take up this question with the Commissioners of other 
stateis and with the companies, in an endeavor to work out a prac- 
tical plan which will eventually result in producing a classification 
of loss experience of such an extent and volume as will furnish a 
basis upon which the true burning-ratio in the various classes of 
risks throughout the country c^n be determined. 

BuiLDii^G Codes. 

The value of better building codes and their rigid enforcement 
is acknowledged. Without specifically recommending a statute 
upon the subject, the Committee makes the recommendation to 
^the Legislature that it frame and enact a comprehensive State 
Building Law, the principles of which shall be observed in the 
building codes of the various municip'alities in the' state and 
which will apply uniformly. The National and 'New York 
Boards of Fire Underwriters and the ^National Tire Protection 
Association will doubtless co-operate in the framing of such a 
statute and the Committee commends them to the Legislature for 
the useful work they have already done along this line. 

Bills carrying into effect the recommendations herein made are 
submitted herewith. 

All of which is respectfully submitted. 

Dated, February 1, 1911. 

On behalf of the Senate, 

ALEX. BKOUGH, 
VICTOR M. ALLEN. 

On behalf of the Assembly, 

EDWIN A. MEEEITT, Jr. | 
WM. W. COLNE, 
EEED'K E. TOOMBS, 
FEANK F. YOUNG. 



-No. 30,] 131 

As to that part of tliis report which deals with the subject of 
corruption and corrupt practices and contains the findings upon 
'^ the testimony taken, we make no comment, except to say that we 
' were not informed by counsel for the Committee during the course 
of its investigation of any matters tending to show corruption 
which came to the notice of counsel. The only knowledge we had 
was that disclosed as the testimony was given from day to day at 
the public hearings. 

We concur, however, in the recommendation proposing the en- 
actment of a statute intended to promptly expose the oifer of a 
bribe. 

We concur in the findings and recommendations relating to the 
subject of fire insurance. As to the findings and recommendations 
concerning the methods of the various fire insurance exchanges 
and other rate-making bodies throughout the state we concur in 
the recommendation requiring the filing of rates and schedules 
with the Superintendent of Insurance and believe that such pub- 
licity will be beneficial. We think, however, that this in itself 
will not bring about the object desired, namely, the maintenance 
of equitable and just rates. Inasmuch as fire insurance is so vital 
and necessary and of such vast importance affecting as it does the 
entire business interests of the state, wo make the further recom- 
mendation that some supervision be had over the rate-making 
bodies, which the testimony disclosed are in the nature of monopo- 
lies and from whose decisions there is no appeal by the assured. 

We propose that a bureau be created in the ofiice of the state 
■Superintendent of Insurance with power upon the filing of a com- 
plaint to order a revision or modification of rates if they are 
found, after investigation, to be unreasonable, excessive, arbitrary 
or unwarranted. 

EOBEET F. WAGI^EK, 
JAMES A. EO'LEiY. 



J 



PROPOSED STATUTES AND AMENDMENTS. 

An" Act to amend article one hundred and twentj-four of chapter * 
eight j-eight of the laws of nineteen hundred and nine, entitled 
''An act providing for the punishment of crime/' constituting 
chapter forty of the consolidated laws. 

The People of the State of New Yorh, represented in Senate 
and Assembly, do enact as folloivs: 

iSection 1. Article one hundred and twenty-four of chapter 
edghty-eight of the laws of nineteen hundred and nine is hereby 
amended by the addition thereto of a new section, to be known as 
section thirteen hundred and twenty-eight-a, to read as follows: 

§ 132 8-a. A member of either of the houses composing the 
legislature of this state, to whom a person shall offer, or cause to 
he offered, a bribe, or any money, property, or value of any kind, 
or any promise or agreement therefor, or luhen any person shall 
attempt, directly or indirectly, hy menace, deceit, suppression of 
truth, or other corrupt ^neans, to influence to give or withhold his 
vote, or to absent himself from the house of which he is a member, 
or from any committee thereof, who shall fail to immediately sub- 
mit the facts in relation thereto to the hou^e of which he is a mewir 
ber, if the house he in session, or if not in session, at the next ses- 
sion thereof, and to the district attorney of the county in which 
the offer or promise ivas made, is punishable hy imprisonment for 
not more than ten years, or by a fine of not more than five thou- 
sand dollars, or both. 

§ 2. This act shall take effect immediately. 

An Act to amend the insurance law by providing for a notice to 
be printed on the cover of policies of mutual fire insurance com- 
panies and in relation to the conditions which may be indorsed 
upon the standard fire insurance policy. 

The People of the State of New Yorh, represented in Senat^^.^ 
and Assembly, do enact as folloius: '.v 

iSection 1. iSection one hundred and twenty of chapter thirty- 
three of the laws of nineteen hundred and nine, entitled ''An act 
in relation to insurance corporations, constituting chapter twenty- 

[132] 



[Assembly, ^o. 30.] 133 

eight of the consolidated laws/' is hereby amended to read as 
follows : 

§ 120. What to appear on face of policy. Every domestic 
mutual fire insurance corporation shall embody the word 
'' mntnal " in its title, which shall appear on the first page 
of every policy and renewal receipt. Every fire insurance 
corporation doing business as a cash stock corporation shall 
upon the face of its policy in some suitable manner express that 
such policy is a policy in a stock corporation. Every policy 
issued in this state under the terms of ivhich the insured named 
in such policy is liable in any event to pay an assessment in addi- 
tion to the premium stated in the policy, shall have visibly printed 
in red ink upon the back or the outside cover thereof, under the 
name of the corporation^ association or person issuing the same, in 
plai7i type, the words: Notice: under the terms of this policy the 
insured is liable for future assessments. 

§ 2. Section one hundred and twenty-one of said chapter is 
hereby amended to read as follows : 

§ 121. The printed blank form of a contract or policy of fire 
insurance, with such provisions, agreements or conditions as may 
be endorsed thereon or added thereto and form a part of such con- 
tract or policy, heretofore filed in the office of the secretary of 
state by the superintendent of insurance or by the E'ew York 
board of fire underwriters pursuant to the provisions of chapter 
four hundred and eighty-eight of the laws of eighteen hundred 
and eighty-six shall be transferred by the secretary of state to 
the office of the superintendent of insurance and, together with 
such provisions, agreements or conditions as may previous to the 
thirty-first day of December, nineteen hundred and [one] eleven, 
be filed by the I^ew York board of fire underwriters in the office 
of the superintendent of insurance and approved by him, which 
provisions, agreements or conditions shall be void if they are in- 
consistent with the standard fire insurance policy heretofore filed 
in the office of the secretary of state, shall be known and desig- 
|nated as the standard fire insurance policy of the state of ]^ew 
York. "J^o fire insurance corporation, its officers or agents, shall 
make, issue, or deliver for use, any fire insurance policy or the re- 
newal of any such policy on property in this state, other than such 



134 [Assembly 

as shall conform in all particulars as to blanks, size of type, con- 
text, provisions, agreements and conditions with sncli printed 
blank form of contract or policy; and no other or different pro- 
vision, agreement, condition or clause shall be in any manner M 
made a part of such contract or policy or indorsed thereon or de- 
livered therewith, except as follows, to-wit: 

1. The name of the corporation, its location and place of busi- 
nesis, date of its incorpioration or organization, whether it is a 
stock or mutual corporation, the names of its officers, the number 
and date of the policy, and if issued through a manager or agent 
the words, "this policy shall not be valid until countersigned by 
the duly authorized manager or agent of the corporation at 



2. Printed or written forms of description and specification, or 
schedules of the property covered by any particular policy, and 
any other matter necessary to clearly express all the facts and con- 
ditions of insurance on any particular risk not inconsistent with 
or a waiver of any of the conditions or provisions of the standard 
policy herein provided for. 

3. With the approval of the superintendent of insurance, if 
the same is not already included in such standard form, any pro- 
vision which lany snch corporation is required by law to insert in 
its policies, not in conflict with the provisions of such standard 
form. Such provisions shall be printed apart from the other pro- 
visions, agreements or conditions of the policy under a separate 
title as follows : " Provisions required by law to be stated in this 
policy." After the first day of January, nineteen hundred and 
eleven, such policy or contract may be printed, written O'r type^ 
written with any size of type or on any size or shape of paper 
which shall have the written appro^'^al of the superintendlent of 
insurance. 

The name, with the word ^^ agent" or "agents," and place of 
business, of any insurance agent or agents, either by writing, 
printing, stamping or otherwise, may be endorsed on the outside 
of such policies. ^ 

Two or more fire insurance corporations, authorized to transact -- 
business in this State, may issue a combination standard form 
policy, using a distinctive title therefor, which title shall appear 
at the head of such policy followed by the titles of the several 



^o. 30.] 135 

corporations obligated thereupooi, and whicli policy shall be exe- 
cuted by tbe officers of each of snch corporations; provid-eid, that 
before such co-rporation shall issue such combination policy, they 
shall have received the express permission of the superintendent 
of insurance to issue the same, and the title of such proposed 
policy and the terms of the additional provisions theireof, hereby 
authorized, shall have been approved by him, v^hich terms, in 
addition to the provisions of the standard policy and not incon- 
sistent therewith, shall provide substantially under a separate 
title therein, to be known as '^ Provisions specially applicable to 
this combination policy," as follows: (a) That each corporation 
executing such policy shall be liable for the full amount of any 
loss or damage, according to the terms of the policy, or a specific 
percentage thereof ; (b) that service of process, or of any notices 
required by the said policy, upon any of the corporations executing 
the same shall be deemed to be service upon all; and provided, 
further, that the unearned premium liability on each policy so 
issued shall be maintained by each of such corporations on the 
basis of the liability of each to the insured thereunder. 

§ 3. This act shall take effect Sleptember first, nineteen hun- 
dred and elevetn. 

An Act to amend the insurance law, so as to permit licensed 
agents to issue and countersign policies to cover surplus line 
insurance. ' 

The People of the State of New Yorh, represented in Senate 
and Assembly, do enact as follows: 

Section 1. iSeotion one hundred and thirty-seven of chapter 
thirty-three of the laws of nineteen hundred and nine, entitled 
''^An act in relation to insurance corporations, constituting chap- 
ter twenty-eight of the consolidated laws," is hereby amended to 
read as follows: 

§ 137. License to agents in excepted cases. The superintend- 
ent of insurance, in consideration of the yearly payment of two 
hundred dollars, except in counties having less than one hundred 
thousand inhabitants, in which case the fee shall not exceed 
twenty-five dollars, may issue to citizens^ firms or corporations 
fof this state] not exceeding two hundred in number, a license 



136 [Assembly 

revocable ai any time:, permittiiig the party named in sucli license 
tO' act as agent to procure from or to issue and countersign policies 
of fire insurance [from] of corporations, persons, partnerstiips 
and associations which are not otheriuise authorized to do business 
in this state. [Before] When any policies of fire insurance shall 
be procured, or issued and countersigned, under or by virtue of 
said license, there shall be e^xecuted by the licensed agent and by 
the party desiring an insurance, an affidavit in duplicate, one of 
which shall be filed in the insnrance department and the other in 
the clerk's office of the county in which the property proposed to 
be insured is located, within thirty diays after the procuring of 
such insurance. Such affidavits shall set forth that the party 
desiring insurance is., after diligent effort, unable to procure the 
amonnt reiquired to protect the property owned or controlled by 
him fro'm the insurance corporations duly authorized to transact 
business in this state. The agent procuring or issuing and coun- 
tersigning policies in such unauthorized corporatioins or with 
personSi, partnerships and associations, shall keep a separate ac- 
count thereof, open at all times to the inspection of the superin- 
tendent, showing, first, the exact amount of such insurance placed 
for any party ; scicond, the gross premiums charged thereon ; third, 
in what corporation, or with what persons, partnerships or asso- 
ciatdons ; fourth, the date of the policy ; fifth, the term thereof, and 
sixth, the cities and villages within this state in which the insured 
propierty is located. E^ach party receiving such license shall, be- 
fore transacting business thereunder, execute and deliver to the 
superintendent a bond to the peiople of the state, in thei penal sum 
of two thousand dollars, with such sxireties as the superintendent 
shall appiiove, conditioned that the said agent will faithfully com- 
ply with all the requirements of this chapter, and will pay to 
the treaSiUrer of the Volunteer Firemen's Association of the state 
of ISTew York, to be expended for the use and support of the 
Volunteer Firemen's Home, located at Hudson, 'Columbia county, 
I^ew York, for the uses and purposes of said association, or, 
where such policies cover risks in cities of over one million inhab- 
itants, having a fire patrol or salvage corps, to the treasurer of 
such fire patrol or salvage corps, in January and July of each 
year, a snm equal to three per centum upon the amount of the 
grosis premiums charged to policy holders less the amount of the 



No. 30.] 137 

gross premiums returned to the insured upon all policies procured, 
or issued and countersigned by him during tlie preceding six 
montliSj pursuant to this article; and in default of pa^yment to 
the treasurer of any fire patrol or salvage corps of any sum to 
which it may be entitled pursuant to the provisions of this section, 
or the treasurer of the said Volunteer Firemen's Home Associa- 
tion of the sum due themj the treasurer of said fire patrol, isalvage 
corps or association may sue for the same in any court of record 
in this state. All fire insurance policies issued to residents; of 
this state on property located herein by companies that have not 
complied with the requirements of the general insurance laws of 
the state, shall be void, except such as shall have been procured, 
or issued and countersigned as herein set forth. All policies 
issued or countersigned hy such agents shall contain the provisions 
of the standard policy provided for hy section one hundred and 
twenty-one of this chapter and a further provision that service of 
a summons or other legal process may he made on the licensed 
agent issuing or countersigning the same and that such service 
sJiall he equivalent to tlie personal service within this state of such 
process on the persons, associations or corporations ohligated 
under any such policies; and such policies shall have printed in 
red ink upon the outside cover thereof, under the name of the 
corporation or association issuing same, in plain type, the words: 
Surplus line insurance only; this company (person, partnership, 
or association, as the case may he) is not^ supervised hy the New 

York State Insurance Department ; issued hy , 

licensed agent, address 

§ 2. This act shall take effect immediately. 

A-^ Act to amend the insurance law by providing that peraoais, 
associations and corporations doing a fire insurance business 
in this state shall report the amounts at risk in congested vahie 
districts. 

The People of the State of New York, represented in Senate 
and Assemhly, do enact as follows: 

■Section 1. Ohapter thirty-three of the laws of nineteen hun- 
dred and nine, entitled '^An act in relation to insurance corpora- 
tions, constituting chapter twenty-eight of the consolidated laws," 



138 [Assembly 

is hereby amended by inserting in article three of said chapter a 
new section, to be section one hundred and forty, and to read as 
follows : 

§ 14^0. Amount at risk in congested value districts to he re- 
ported. Every association, corporation or person authorized to 
do the husijiess of fire insurance within this state shall report in 
the annual statement required to he filed hy section forty-four 
of this chapter the total amount wliich said persons, associations 
or corporations have at risk on policies of insurance issued hy 
them or on contracts or treaties of reinsurance which covers and 
insures property located in the congested value districts of all 
cities in the United States of over three hundred thousand in- 
hahitants. Such reports shall show: {a) The total amount luhich 
each such person, association or corporation has at rish hy reason 
of its outstanding policies of insurance or contracts of reinsur- 
ance covering property in such districts ; (h) the total amount of 
such insurance which is re-insured with persons, associations or 
corporations which are authorized to do husiness in this state; 
(c) the total amount of such insurance which is reinsured luith 
persons, associations or corporations not authorized to do husiness 
in this state. The houndaries of such districts shall he fixed and 
defined from time to time hy the superintendent of insurance. 

'§ 2. This act shall take effect immediately. 

An Act to amend the insurance law by providing for the regulation 
and supervision of rate making associations. 

The People of the State of New Yorlc, represented in Senate 
and Assemhly, do enact as follows: 

Section 1. Chapter thirty- three of the laws of nineteen huii- 
dred and nine, entitled '^An act in relation to insurance corpora- 
tions, constituting chapter twenty-eight of the consolidated law?,*" 
is hereby amended by inserting in article three of said chapter a 
new section, to be section one hundred and forty-one thereof, and 
to read as follows : 

§ 141. Rate maJcing associations. Every association or hureau 
which now exists or hereafter may he formed for the purpose of 
making rates of fire insurance on property located in this state 



'No, 30.] 139' 

shall he subject to the visitation and supervision of the superiit- 
tendent of insurance ivho shall cause an examination of each such. 

■^v association or bureau to be made at least once a year, and shall 
' make public the results thereof, and shall report to the legislature 
in his annual report on the methods of such associations or bureaus 
and the manner of their operation. 

Every such association or bureau shall file with the superin- 
tendent of insurance all schedules of rates fixed or made by it, 
which shall include in every instance the bo.sis rate on each class 
of property concerning which rates are made, and all forms of 
warranties and all credits, charges, terms, conditions or privileges 
and any other 'inatters which may affect such rates or the appli- 
cation of such schedules; it shall also file the specific rates on all 
property ivhere such rates have been fixed in those cases, if any, 
where the general schedules so filed do not apply, with a full 
explanation of the reason for such specific rate or rates; it shall 
also file immediate notice of any change in such schedules or 
rates and the causes therefor; it shall also file such further in- 
formation as to such schedules or rates as may be required by 
the superintendent ; no such association or bureau or any person, 
association or corporation authorized to transact the business of 
fire insurance luithin this state shall fix or maJce any rate or 
schedule or any credit therein which is to apply to any risk on 
the condition that the luhole amount of insurance on such risk 
or any specific part thereof shall be placed at such rate, or with the 
members of such association or bureau, or with a specified class 
of insurers; or shall fix or make a schedule of rates or charge a rate 
which discriminates between risks of essentially the same hazard 
and which are similarly protected against fire within this state; 
whenever it is made to appear to the satisfaction of the superin- 
tendent of insurance that such discrimination exists he may, 
after a full hearing, either before himself or a special deputy ap- 
pointed for such purpose whose report he may adopt, order the rates 
on such risks to be made uniform, and all such associations, bu- 

J reaus, persons or corporations affected thereby shall immediately 
comply therewith ; no such association or bureau shall be permitted 
hereafter to license brokers to transact the business of fire insur^ 
ance, nor shall it or any two or tnore persons, associations or cor- 
porations authorized to transact the business of fire insurance 



140 [Assembly 

within this state, acting in agreement, refuse to do business with 
or pay commissions to any person who may he licensed by the su- 
perintendent of insurance as a fire insurance brother, upon the 
ground or for the reason that such broker offers insurance to other 
persons, associations or corporations not members of such associa- 
tion or bureau or parties to such agreement, or because such brok- 
ers luill not agree to secure insurance only at the rates fixed by 
such association or bureau, or seek to restrain or interfere ivith 
any such licejised broker in the transaction of his business, in any 
manner other than by proceeding against such broker according 
to law for violation thereof. 

Every such association or bureau shall keep a careful record of 
its proceedings and shall furnish upon demand to any person on 
whose property a rate has been made, or his authorized agent, full 
information as to such rate and if such property be rated by 
schedule a copy of such schedule; it shall also provide such means 
as may be approved by the superintendent of insurance whereby 
any person or persons affected by such rate or rates may be heard,, 
either in person or by agent, before the governing or rating com^ 
mittee of such association or bureau on an application for a 
change in such rate or rates. 

§ 2. This act shall take effect September first, nineteen hun- 
dred and eleven. 

An Act to amend the insurance law by providing that no com- 
missions are to be paid agents or brokers for fire insurance un- 
less they are authorized by a certificate of authority to trans- 
act a fire insurance business. 

The People of the State of New York, represented in Senate 
and Assembly, do enact as follows: 

'Section 1. Ohapter thirty-three of the laws of nineteen hundred 
and nine, entitled ''An act in relation to insurance corporations, 
constituting chapter twenty-eight of the consolidated laws," is 
hereby amended by inserting in article three of said chapter a 
new section, to be section one hundred and forty-two, and to read 
as follows: 

§ 142. Business to be accepted from licensed agents and 
Brokers only; Agents' and Brokers' Certificates of Authority. 
No corporation, association or person authorized to do a fire 







:^o. 30.] 141 

insurance business ivithin this state, or agent thereof, shall 
pay any commission or any other compensation to any person for 
services in obtaining any such insurance upon property located 
witJiin this state, unless such person shall have first procured from 
the superintendent of insurance a certificate of authority to act 
as an agent of such corporation, association or person, or as a 
hroJcer to solicit such insurance as hereinafter provided. No person 
or corporation shall act as agent, subagent, or broker in the solici- 
tation or procurement of applications for such insurance, or receive 
for services in obtaining such insurance any commission or other 
compensation from any corporation, association or person author- 
ized to do a fire insurance business in this state, or agent thereof, 
without first procuring a certificate of authority so to act from, 
the superintendent of insurance, which must be renewed annually 
on the first day of January, or within six months thereafter. The 
certificates of authority to be issued by the superintendent of in- 
surance under this section shall be divided into two classes, namely, 
one class by which the holders thereof shall be aidhorized to act 
as agents, and the other by wliich the holders thereof shall be au- 
thorized to act as brokers. The fee to be paid to the superintend- 
ent of insurance by the applicant at the time application is made 
shall be, for each agent's certificate two dollars, and for each 
broker s certificate ten dollars. Such certificates shall be issued by 
the superintendent of insurance only upon the ivritten application 
of persons and corporations desiring such autliority, and in the case 
of agents or corporations applying for such certificates of authority 
to act as agent, such application must be approved and counter- 
signed by at least one of the corporations, associations or persons 
such applicant desires to represent; all such apjplications shall be 
upon forms approved by the superintendent of insurance, giving 
such information as he may recpiire. The superintendent of insur- 
ance shall grant any such certificate of authority if he is satisfied 
and determines that the person or corporation making the applica- 
tion for such certificate is trustworthy and is competent to transact 
the business for which the application of such certificate is made, 
as agent or broker as the case may be, and such certificate of au- 
thority may be revoked by the superintendent of insurance upon it 
appearing to him that such agent or broker has ceased to be com- 
petent or ti^stivorthy, or has violated any provision of this chapter, 



142 [Assembly 

or has issued or procured insurance on any property located in this 
state in behalf of or from any person, association or corporation 
not permitted by this chapter to ivrite such insurance, or has re- 
fused or refuses to return to any corporation, association or person 
any part of any commissions paid to him or it on policies which 
have been subsequently canceled, unless such person or corporation 
is relieved from such obligation by any person, corporation or asso- 
ciation who was liable on such policy as insurer. No such certifi- 
cate shall be valid, however, in any event, after the first day of 
Jidy of the year following the issuing of the same. Such certifi- 
cates of authority shall be executed in triplicate; one copy thereof 
shall be filed in the office of the superintendent of insurance, and 
two copies thereof shall be issued to such agent or broker; one of 
which copies such agent or broker shall, luithin thirty days after 
such certificate of authority is issued, cause to be filed in the office 
of the clerk of the county in which such agent or broker resides or 
has his or its principal place of business, or, if a nonresident, 
in the office of the clerk of the county in this state in which he or 
it has an office for the transaction of business. Any person or 
corporation violating the provisions of this section shall forfeit to 
the state the sum of five hundred dollars. 

§ 2. This act shall take effect January iirst^ nineteen hundred 
and twelve. 

An Act to amend the insurance law by prohibiting rebating and 
discrimination in relation to premiums paid for fire insurance. 

The People of the State of New York, represented in Senate 
and Assembly, do enact as follows: 

Section 1. 'Chapter thirty-three of the laws of nineteen hundred 
and nine, entitled ^^An act in relation to insurance corporations, 
constituting chapter twenty-eight of the consolidated laws/' is 
hereby amended by inserting in article three of said chapter a new 
section, to be section one hundred and forty-three, and to read as 
follows : 

§ 143. Rebating and discrimination prohilnted. No insurance 
corporation, association, partnership, Lloyds, or individual under- 
luriters authorized to do the business of fire insurance witliin this 



1^0. 30.] '' 143 '^^'n-- -^ 

state^ or a7iy ajficer, agent, solicitor or represefitative thereof, 
shall make any contract of fire insurance on property located 
iuithin this state or agreement as to such contract, other than as 
plainly expressed in the policy issued or to he issued thereon; 
nor shall any such corporation, association, partnership, Lloyds 
or individual underwriters, or officer, agent, solicitor, or repre- 
sentative thereof, directly or indirectly, in any manner luhatso- 
ever, pay or allow or offer to pay or allow as inducement to such 
insurance, or after the insurance shall have been effected, any 
rebate from the premium which is specified in the policy or any 
special favor or advantage in the dividends or other benefit to 
accrue thereon, or any valuable consideration or inducement 
ivhatever, not specified in the policy or contract of insurance, 
or give, sell or purchase, or offer to give, sell or purchase, as in- 
ducement to such insurance, or in connection therewith, any stock, 
bonds or other securities of any insurance company, or other cor- 
poration or association, or any dividends or profits accrued 
thereon, or anything of value whatsoever, not specified in the 
policy, nor shall any fire insurance broker, his agent or representa- 
tive, or any other person, directly or indirectly, either by sharing 
commissions or in any manner whatsoever pay or allow or offer 
to pay or allow as inducement to such insurance, or after the in- 
surance shall have been effected, any rebate from the premium 
ivhich is specified in the policy; nor shall the insured, his agent 
or representative, directly or indirectly, accept or Jcnoiuingly re- 
ceive any such rebate from the premium specified in the policy; 
this section shall not prevent any corporation, person, partnership 
or association lawfully doing the business of fire insurance in this 
state from the distribution of surplus and dividends to policyhold- 
ers after the first year of insurance; nor shall this section prevent 
any such corporation or other insurer, or his or its agent, from 
paying commissions to the broker luho shall have effected the in- 
surance. 

No person shall be excused from attending and, when ordered 
so to do, from testifying or producing any books, papers or other 
documents before any court or magistrate, upon any investigation, 
proceeding or trial for a violation of any of the provisions of this 
section, upon the ground or for the reason that the testimony or 



144 [Assembly 

evidence, documentary or otherwise, required of him may tend to 
convict him of a crime or subject him to a penalty or forfeiture, 
hut no person shall he prosecuted or subjected to any penalty or 
forfeiture for or on account of any transaction, matter or thing 
concerning vjhich he may have been required so to testify or to 
produce evidence, documentary or otherwise, and no testimony so 
given or produced shall be received against him upon any criminal 
investigation or proceeding. Any person or corporation violating 
the provisions of this section shall he guilty of a misdemeanor and 
shall forfeit to the people of the state the sum of five hundred 
dollars for each such violation. 

§ 2. This act shall take effect immediatelj. 

An Act to amend the insurance law by providing for the admis- 
sion of certain mutual fire insurance corporations of other 
states. 

The People of the State of New YorJc, represented in Senate 
and Assembly, do enact as follows: 

Section 1. Section one hundred and forty-nine of chapter 
thirty-three of the laws of nineteen hundred and nine, entitled 
"An act in relation to insurance corporations, constituting chapter 
twenty-eight of the consolidated laws/' is hereby amended to read 
as follows: 

§ 149. Authorization of foreign mutual fire insurance corpo- 
rations. Every mutual fire insurance company or asisociation 
incorporated under the laws of any other state of the United 
States may be permitted to do business in this state by the super- 
intendent of insurance on filing with him the following : 

(a) A certified copy of its articles of incorporation or associa- 
tion and of its by-laws. 

(b) A consent, duly executed, appointing the superintendent of 
insurance to be the true and lawful attorney for such company or 
association in and for this state, upon whom all legal process in 
any action or proceeding against the company or association may 
be served with the same effect as if it was a domestic company or 
association. Service upon such attorney shall thereafter be 
deemed service upon the company or association. 



:^o. 30.] 145 

(c) An agreement that it will pay the taxes provided for in 
section one hundred and fortj-nine-a of this chapter, and that it 

^.^ will furnish any further information as to its financial condition, 
- and the premiums collected by it within this state, as the super- 
intendent of insurance shall require. 

(d) And each such com^pany shall pay to the superintendent of 
insurance the fees required by section six of this chapter. 

Provided, that no such certificate of authority shall be granted 
unless such company shall [keep on deposit with the superintend- 
ent of insurance of this state or with the auditor, comptroller or 
general fiscal ofiicer of the state by whose laws it is incorporated, 
the sum of two hundred thousand dollars, in securities of the kijid 
and character in which domestic fire insurance companies are re- 
quired to invest as minimum capital investments by section six- 
teen of this chapter. The superintendent of insurance shall be 
furnished with a certificate of such auditor, comptroller or general 
fiscal ofiicer, under his hand and ofiicial seal, that he, as such 
auditor, comptroller or general fiscal officer of said state, holds in 
trust and on deposit for the benefit of all the policyholders of the 
corporation sucrh 'stock and securities. Such certificate shall em- 
brace the items of securities so held and shall state that the ofiicer 
making it is satisfied that the securities are worth the amount 
herein required ; and 

Provided, further, that such company shall annually file satis- 
factory proof with the superintendent of insurance that it has 
and maintains in addition to the foregoing deposit a reserve fund 
equal to the total unearned premiums on the policies in force, cal- 
culated on the gross sum without any deduction on any account 
charged to the policyholders on each respective risk from the date 
of the issue of the policy; and 

Provided, further, that the certificate of authority granted by 
the superintendent of insurance, pursuant to the provisions of 
this act, to such insurance corporation to do business in this state, 
shall not remain in force for a longer period than one year. The 
. statements and evidences of investment required by this act to be 
filed in the office of the superintendent of insurance before a cer- 
tificate of authority is granted to such corporation, shall be re- 
newed from year to year, and in such manner and form as the 



' ^ 146 [Assembly 

superintendent may require^ witli an additional statement of the 
amount of premiums received, as required by this act, and losses 
sustained in this state during the preceding year, so long as such 
authority continues. If the superintendent is satisfied that the ^, 
securities and investments remain secure and that it may be safely 
intrusted with the continuance of its authority to do business, he 
may grant a renewal of such certificate of authority.] have at 
least five million dollars of insurance in force in not less than two 
hundred separate risJc-s and shall have transacted a fire insurance 
business in its home state for at least ten years and shall luive had 
insurance in force in at least the amount of five million dollars in 
each of the five years immediately preceding its application for ad- 
mission to do business in this state; and shall have and maintain 
a reserve fund equal to the total unearned premiums on the policies 
in force calcidated on the gross sum without any deduction on any 
account charged to policyholders on each respective risk from the 
date of the issue of the policy and in addition has a reserve or sur- 
plus or other net assets of at least fifty thousand dollars invested in 
securities of the hind and character in which domestic fire insur- 
ance companies are required to invest as wAnimum capital invest- 
ments hy section sixteen of this chapter^ and in addition lias con- 
tingent assets of at least fifty thousand dollars in the form of the 
obligations of policyholders to pay to such company such amount 
in the event the funds of such company fall below the amount re- 
quired to meet all liabilities and to maintain the unearned pre- 
mium reserve; and shall have net and contingent assets together in 
an amount equal to two per centum of the total insurance in force; 
and shall provide in all policies issued by it that the policyholder 
is liable, in addition to the original premium paid, to assessment 
in an amount at least equal to one year's premiums; provided, 
further, that no sucJ^ company shall be exposed to loss to an 
amount exceeding ten per centum of its actual net and contingent 
assets upon property situated within the boundaries of one city 
blocJv or on one group of buildings composed of attached or ad- 
jacent buildings which have less than sixty feet of clear spact at all f- 
points betiueen such buildings and other buildings; provided, ^ 
further, that the certificate of authority granted by the superin^ 
fendent of insurance pursuant to the provisions of this act to such 



-No. 30.] 147 

insurance corporwtion to do hiisiness in this state shall not remain 
in force for a longer period than one year and that whenever the 
condition of any such corporation to luhich a certificate of author- 
ity has been granted is such that it cannot meet all the require- 
ments of this section the superintendent of insurance shall forth- 
with revoke such certificate. 

§ 2. iSection one hundred and forty-nine-a of said chapter is 
hereby amended to read as follows : 

§ 14:9-a. [Tax on foreign mutual fire insurance corporation.] 
Premium or Assessment Tax. Every mutual fire insurance 
company or association authorized to do busines'S in this state 
pursuant to section one hundred and forty-nine of this chapter 
shall^ m lieu of all other taxes on premiums annually, on or before 
the first day of February of each year, pay a tax of [one] three 
per centum on all [gross] net premiums or assessments collected 
or received and retained by it ot them for such insurance upon 
property situate within this state during the preceding year ending 
the thirty-first day of December to the Superintendent of Insur- 
ance. The term '' net premiwn or assessments " shall in no event 
include any amounts returned to policyholders hy luay of unearned 
premiums on canceled policies, returns on account of reduction of 
rates or any dividends whatsoever. On or before the first day of 
February of each year every such company or association shall file 
with said superintendent a [detailed] statement showing the 
[gross] net amount of premiums and assessments collected and 
retained during the preceding year, for insurance upon property 
located in this state [and specifying the amounts of premiums 
and asises's^ments so collected by city, town, village or fire district 
in which the property covered by such insurance is located]. In 
case any such company or association shall neglect or refuse to 
make and file such report, or pay the tax imposed in this section, 
its certificate of authority to do business in this state shall be 
revoked by the superintendent of insurance and it shall forfeit 
the sum of one hundred dollars for each day after the first day of 
February of each year that it shall omit to make and file such 
report, or shall neglect to pay the tax imposed by this section, 
which sum shall be collected in an action in the name of the 
people of the state of jSTew York to be prosecuted by the superin- 



148 [Assembly 

tendent of insurance and collected by him. After the neglect or 
refusal of such company or association to make and file such re- 
port, or pay such tax, such company or association or its agents ^ 
shall not effect any insurance on any property in this state. w- 

§ 3. Section one hundred and forty-nine-c of said chapter is 
hereby amended to read as followis : 

§ l'49'-c. Distribution of Tax. Tern \per senium of all 
[All] moneys received by the superintendent of insurance 
under the provisions of section one hundred and forty- 
nine-a of this chapter shall be [distributed by him on 
April first of each year after deducting the expenses of the 
collection and distribution thereof, as follows : Ten per centum 
thereof] paid to the Firemen's Association of the state of New 
York for the support and maintenance of the Firemen's Home at 
Hudson, New York, and the balance [to the various associations, 
cities, villages and fire districts in the same manner and to the 
same extent as the tax imposed by section one hundred and thirty- 
three of this chapter is now received by them, except that in the 
cities of New York and Buffalo, he shall pay the same to the officers 
and associations now receiving the tax imposed on foreign fire in- 
surance companies under the provisions of the charters of said 
cities. The superintendent of insurance shall appoint, for a term 
not exceeding his own term of office a suitable and competent person 
to collect and distribute the tax imposed by section one hundred 
and forty-nine-a of this chapter. The person so appointed shall 
receive such compensation for his services and disbursements as 
the superintendent of insurance shall fix, but the same shall be pay- 
able only from the moneys which the said superintendent shall re- 
ceive under the provisions of said last mentioned section.] shall 
he paid hy him into the state treasury. 

§ 4. This act shall take effect immediately. 

An Act to amend the insurance law, providing that those county 
and town co-operative associations which, prior to July first, M 
nineteen hundred and ten, were issuing policies of iusuraneo 
on mercantile and manufacturing risks in amounts uot to ex- 
ceed four thousand dollars may continue to issue such iusuraucc. 



Ko. 30.] 149 

The People of the State of New Yorl;, represented in Senate 
and Assembly, do enact as follotvs: 

Section 1. Section two hundred and sixty-six of chapter thirty- 
three of the laws of nineteen hundred and nine, entitled "An act 
in relation to insurance corporations, constituting chapter twenty- 
eight of the consolidated laws," as amended by chapter three 
hundred and twenty-eight of the laws of nineteen hundred and ten, 
is hereby amended to read as follows : 

§ 266. General provisions affecting assesnient corporations 
only. The following provisions shall affect corporations doing 
business on the assessment plan, pursuant to the provisions of this 
article. 

1. iSuch corporations may issue policies of insurance against 
any loss or damage to detached dwelling houses, barns, hop houses, 
cheese factories, creameries, school buildings and other buildings, 
and the contents of any such buildings, together with the 
live stock owned on the premises by the insured; provided 
that nothing herein contained shall authorize such corpora- 
tions to issue policies on buildings used for hotel, mercan- 
tile or manufacturing purposes, except that such corporations 
which were, prior to July first, nineteen hundred and ten, issu- 
ing insurance on such insJcs may continue to issue insurance thereon 
in amounts of not more than four thousand dollars on each separate 
risk; and provided, further, that no such policy shall be issued for 
more than seven thousand dollars on any one risk, or, if such 
policy is against loss or damage by reason of larceny, to the extent 
of not more than five hundred dollars on any one risk. 

2. Every such corporation may classify the buildings or prop- 
erty insured therein at the time of the insurance and issue policies 
under different rates. 

3. Every such corporation may borrow, on the credit of the 
corporation, sufficient to pay any loss, or make an assessment upon 
all the property insured, pro rata, according to the classification 
or according to the amount insured, as may be provided in the by- 
laws, sufficient to pay such loss. If it is deemed to be for the best 
interest of the corporation, such corporation may estimate the 
amount necessary to pay all the losses and expenses for the cur- 
rent year and to supply any deficiency in the preceding year, and 



150 [Assembly 

asisess and collect; the same from the members of the corporation. 
Each assesment shall be made pro rata upon all the property at the 
time insured, according to its classification or according to the M 
amount insured. ^ 

§ 2. This act shall take effect immediately. 

An Act to amend the insurance law, in relation to the organiza- 
tion of personsi, partnerships, or associations engaging in the 
business of insurance as Lloyds or inter-insurers, and to permit 
the admission Lloyds of other states, and to provide for the 
forwarding of process by the superintendent of insiurance. 

The People of the State of New York, represented in Senate 
and Assembly^ do enact as follows: 

Section 1. Section thirty-five of chapter thirty-three of the 
laws of nineteen hundred -and nine, entitled '^An act in relation 
to insurance corporations, constituting chapter twenty-eight of the 
consolidated lawsi,'^ is hereby amended to read as follows : 

§ 35. Superintendent to forward process. Whenever lawful 
process against an insurance coTporation or one or more persons 
shall be served upon the s-uperintendent of insurance under the 
provisions of this chapter, he shall forthwith forward a copy of 
snch process by mail, prepaid and directed to the secretary of the 
corporation or to such person or persons or in the oasie of corpora- 
tions incorporated under the laws of any foreign government, to 
the resident manager or last appointed general agent of the •cor- 
poration in this country. 

For each copy of process the superintendent shall collect the 
sum of two dollars, w^hich shall be piaid by the plaintiff at the 
time of such service, to be recovered by him as part of the taxable 
disbursements if he succeeds in the snit. 

§ 2. Siection three hundred of chapter thirty- three of the laws 
of nineteen hundred and nine, entitled ^^An act in relation to 
insurance corporations, constituting chapter twenty-eight of the 
consolidated laws," as amended by chapter six hundred and thirty- ■ 
eight of the laws of nineteen hundred and ten, is hereby amended 
to read as follows: 

§ 30O. Application of article. E'otwithstanding the pro- 
visions of section fifty-four of this chapter, persons, part- 



N"o. 30.] 151 

nerships or associations which^ on October first, eighteen 
hundred and ninety-two, were lawfully and actually engaged 
in the business of insurance as Lloyds or inter-insurers or 
individual underwriters may, after January first, nineteen 
hundred and eleven, continue to do the business of insurance 
in this state, provided that such persons, partnerships or associa- 
tions shall comply with the provisions of this article, but not other- 
wisejf. ''No persons, partnerships or associations other than those 
specified in this section, and which shall receive the oertifiioate of 
insurance specified in section three hundred and one of this chap- 
ter, shall, after January first, nineteen hundred and eleven, en- 
gage in the business of insurance in this state as Lloyds or inter- 
insurers.]; and such persons, partnerships and associations as 
may comply ivith and he licensed according to sections three hun- 
dred and four and three hundred and five of this article may do 
such insurance husiness as is therein permitted. Any persons, part- 
nerships or association which, after January first, nineteen hun- 
dred and eleven, shall in this state engage in the business of in- 
surance as Lloyds or inter-insurers, or represent or advertise that 
they are so engaged, without having been authorized so to do in 
accordance with the provisions of this article, and any agent, sub- 
agent, or representative of any such persons, partnerships, or as- 
sociation not so authorized to do such business in this state, who 
shall after January first, nineteen hundred and eleven, in any way 
represent any such unauthorized persons, partnerships or associa- 
tions, directly or indirectly, in engaging or attempting to engage 
in the business of insurance in this state, shall be guilty of a mis- 
demeanor. 

§ 3. (Section three hundred and two of said chapter is hereby 
amended to read as follows : 

§ 30:2. General provisions affecting Lloyds and inter-insurers 
licensed under the preceding section. No such persons, partner- 
ships or assoiciations who claim that they were lawfully and actu- 
ally doing the hu^iness of insurance in this state as Lloyds or 
> inter-insurers on Octoher first, eighteen hundred and ninety-two, 
shall, after January first, nineteen hundred and eleven, engage in 
the business of insurance in this state as Lloyds or inter-insurers, 
(a) unless there shall be on file in the office of the superintendent 
of insurance a copy of the original articles of association, co- 



152 [Assembly 

partne'rship agreeiment or inteir-insiirance contract, togeither with 
all ameaidments thereto, accompamed by an affidavit, verified by 
an attorney-in-fact, to the effect that it is, a true copy, and stating ^. 
wheire the principal office of such personsi, partnerships, or associa-" 
tions so doing snch business is located, the kinds of insurance in 
which it is engaged, or in which it lawfully claims the right to 
engage, the name under which business is done and the names 
and post-office addresses of all the underwriters, inter-insurers and 
attorneys-in-fact so doing business as Lloyds or interinsurers, 
which affidavit shall be so verified not earlier than Decemiber fif- 
teenth, nineteen hundred and ten; or (b) which shall change the 
name under which business is done, without first obtaining the 
written approval of the suj^erintendent of insurance; or (c) which 
shall establish branches under other or different names or titles ; 
or (d) which shall have a name so similar to that of any other 
Lloyds or insurance corporation as in the opinion of the superin- 
tendent of insurance is calculated to deceive, and any eixisting 
Lloyds having such a name may be required to change same by 
the superintendent of insurance; or (e) which does not maintain 
at all times, in addition to all outstanding claims and other lia- 
bilities, a sum equal to the total unearned premiums on the poli- 
cies in force, calculated on the gross sums without smj deduction 
on any account, charged to the policyholder on each respective 
risk from the date of the policy; or (f) which shall not have its 
assets invested as prescribed by section sixteen of this chapter; 
or (g) unless each of the underwriters shall be worth in his own 
right not less than twenty thousand dollars above all liabilities, 
such facts to be determineid by the superintendent of insurance, 
and in determining same he may take the signed reports of com- 
mercial agencies having upwards of one hundred thousand sub- 
scribers. No such persons, partnerships or associations shall 
change the location of their principal office for the transaction of 
business without first filing with the superintendent of insurance 
the affidavit of an attorney-in-fact stating where such office is to 
be located, and in no event shall such office be located outside the,«f\ 
state of 'New York. Every change in the underwriters, inter- 
insurers or attorneys-in-fact, made after the filing of the affidavit 
previously mentioned in this article, shall be reported to the su- 



'No. 30.] 153 

perintendent of insurance bv a written verified statement of an 
attorney-in-fact within twenty days after the same has been made, 
which affidavit shall be accompanied by an agreement, executed 
,lind duly acknowledged, and binding the new underwriter or 
underwriters, inter-insurer or inter-insurers to the original agree- 
ment between all the underwriters or inter-insairers require^d to be 
filed by section three hundred and one of this chapter, with regard 
to the service of process. The underwriters' liability shall not 
be included in the statements or reports of such persons, partner- 
ships or associations either as an asset or a liability and any de- 
posit made by an under^vriter with any such persons, partnerships 
or assO'ciations, if treated as an asset in any statement or report, 
shall also be charged as a liability. 

§ 4. Article X of such chapter is hereby amended by adding 
thereto two sections to be known as sections three hundred and four 
and three hundred and Rve, and to read as follows; 

§ 304. General provisions affecting Lloyds and inter-insurance 
associations organized after July firsts nineteen hundred and eleven. 
On and after July firsts nineteen hundred eleven^ twenty-five or 
more persons, partnerships or corporations luhich have the recjuisite 
authority hy their charters may engage in the hiisijiess of such in- 
surance as is specified in sections one hundred and ten and one 
hund7^ed and fifty of this chapter as Lloyds or inter-insurers upon 
receiving a certificate of authority from the superintendent of in- 
surance so to do. The application for such certificate of authority 
shall be signed hy the attorney or attorneys-in-fact of those persons 
desiring such certificate and must he accompanied hy a declaration 
ivhich must set forth, (a) the name under ivhich the husiness is 
to he conducted ivhich name shall not he so similar to any existing 
Lloyds, inter-insurance association or corporation, as, in the opin- 
ion of the superintendent of insurance is calculated to deceive; (h) 
the exact location of the principal office at which the husiness is 
to he conducted, which office must he in the state of New Yorh; 
(c) the Jiinds of insurance intended to he written, which must he 
)Only of those permitted hy this section; (d) an exact copy of the 
' articles of association, copartnership agreements or inter-vnsurance 
contract made hetween such underwriters or inter-insurers ; (e) 
the names and addresses of all the underwriters or inter-insurers 



154 [Assembly 

so proposing to engage in such business; (f) the designation and 
appointment of one or more attorney s-inrf act luho shall he residents 
of this state, ivith full names and addresses, upon whom a summons 
or other legal process can he served; (g) that a fund of at least twom 
hundred thousand dollars has been contributed hy the subscribers^ 
as a guaranty fund for policyholders and is in the possession 
of the attorney or attorneys-in-fact for such subscribers and 
is either in cash or invested in such securities as are specified 
in section sixteen of this chapter. Such declaration must he signed 
and sworn to by all of the persons, and the proper officers of the 
corporations so proposing to engage in the business of insurance 
pursuant to this section. After such documents specified shall be 
filed, the superintendent of insurance shall cause an examination 
of such Lloyds or inter-insurance association to be made, and if he 
is satisfied that all of the facts alleged in the declaration are true 
and that the article of association, copartnership agreement or in- 
ter-insurance contract are of such a character that the rights of the 
policyholders will be protected thereunder, he shall issue a certifi- 
cate of authority to do such business of insurance in this state as 
is specified in the declaration, which certificate shall be issued to 
such Lloyds or inter-insurance association, under the name chosen 
and approved, authorizing the underwriters or inter-insurers thereof 
to do the business permitted. Any such Lloyds and inter-insurance 
associations as may be thus authorized to do business in this state 
(1) shall at all times Iceep and maintain a fund of an amount equal 
to all outstanding -claims and other liabilities, plus the unearned 
premiums on the policies in force, calculated on the gross sums, 
without any deduction on any account, charged to the policyholder 
on each respective rish from the date of the policy, and in addition 
the sum of two hundred thousand dollars; (2) shall not change 
the name under which business is done without first obtaining the 
written approval of the superintendent of insurance; (3) shall not 
establish branches under other or different names or titles; (Jf) 
shall have its assets either in cash or invested as prescribed by sen- 
tion sixteen of this chapter; (5) shall notify the superintendent of ^ 
insurance of any change in the location of its principal ofifice for the^ 
transaction of business, which office shall always be in the state of 
New York, tuhich said notice shall be in the form of a declaration 



'No, 30.] 155 

subscribed and sworn to by its attorney or attorneys-in-fact; (6) 
shall notify the superintendent of insurance of any change in its un- 
derwriters or inter-insurers, which notice shall be in the form of a 
declaration subscribed and sworn to by its attorney or attorneys in- 
factj (7) shall not amend or change its articles of association, co- 
partnership agreement or inter-insurance contract without the ap- 
proval of the superintendent of insurance, and a true copy of any 
amendment or change permitted shall be verified by an attorney-in- 
fact of such Lloyds or inter-^insurance association and be filed with 
the superintendent of insurance; (8) shall notrify the superintend- 
ent of insurance of any change in its attorney or attorneys-in-fact 
by filing ivith the superintendent of insurance an instruonent re- 
volting the designation or appointment of any attorney or attor- 
neys-in-fact ivho are no longer to act for such underiuriters or inter- 
insurers, and designating and appointing one or more attorneys-in- 
fact, residents of this state with fidl names and addresses, who 
shall thereafter be the attorney or attorneys-in-fact for such under- 
iuriters or inter-insurers, such instrument to be signed and sworn 
to by each and every of the underwriters or inter-insurers who 
shall then be doing business under such authority. 

After any Lloyds or inter-insurance association is authorized to 
do business in this state, pursuant to this section^ it may be joined 
by other and additional undervjriters or inter-insurers, but in that 
event such underwriters or inter-insurers who may thereafter join 
such authorized Lloyds or inter-insurance association shall be held 
to be hound by the documents on file with the superintendent of 
insurance concerning such Lloyds or inter-insurance association in 
the saine m.anner as though they had personally signed the same, 
and the attorney or attorneys-in-fact then authorized by the under- 
iuriters of such Lloyds or inter-insurance association to act for them 
shall thereafter and subject to the provisions of this section be the 
attorney or attorneys-in-fact for such additional underwriter's, and 
service of a summons or other legal process on an attorney-inrfact 
for the underwriters of such Lloyds or inter-insurance association 
lohose appointment is in force and so filed ivith the superintend- 
^ ent of insurance shall be equivalent to the personal service of such 
process on each and every of such underiuriters and inter-insurers 
ivithin this state. 



156 [Assembly 

The funds required hy this section to he held hy any Lloyds or 
inter-insurance association and all other undistributed funds held 
hy it shall he liable primarily for the payment of any losses in- 
curred under its policies, and any judgments recovered under any H 
such policies agai^ist the underivriters thereon may he satisfied 
from such funds without regard to the extent of the various under- 
writers' interests therein, and such funds shall not he subject to 
the claims of general creditors of any of the underwriters of such 
Lloyds or inter-insurance association, other than policyholder cred- 
itors whose claims have arisen under their policies, until all pol- 
icies under which any such underwriter is obligated have been 
terminated, and in that event the claims of such general creditors 
shall not be paid from such fund or be a lien upon any part 
thereof beyond an amount which when paid ivill leave intact and 
in the possession of such TJoyds or inter-insurance association an 
amount equal to the full unearned premiums on all policies in 
force and in addition the sum of tiuo hundred thousand dollars as 
provided herein. Any clause in any policy issued by any such 
TJoyds or inter-insurance association ivhich shall contain any pro- 
vision inconsistent with this section shall he void. 

§ 30'5. Provisions for the admission of Lloyds and inter-insur- 
ance associations domiciled in other states. On and after Tidy 
first, nineteen hundred and eleven, the superintendent of insur- 
ance may in his discretion issue a certificate of authority to a 
Lloyds or inter-insurance association domiciled in another state to 
do such insurance business in this state, for permission to do 
which application is made, and as may be authorized by the arti- 
cles of association, partnership agreement or inter-insurance con- 
tract under luhich such Lloyds or inter-insurance association is 
operating, providing, however, that in no event shall authority be 
given to any such Lloyds or inter4nsurance association to do other 
hinds of insurance business than those specified in sections one 
hundred and ten and one hundred and fifty of this chapter. 

The application for such certificate shall specify the Mnds of 
business such Lloyds or inter-insurance association desires author- m 
ity to transact within this state; it must be signed hy the attorney ™ 
or attorneys-in-fact for such Lloyds or inter-insurance associa- 
tion and must be filed ivith the superintendent of insurance to- 



No. 30.] 157 

gether ivith, (a) a certificate from the insurance department of its 
home state that it has and maintains at all times an amount equal 
to all outstanding claims and other liabilities, plus the unearned 
premiums on all policies in force, calculated on the gross sums, 
without any deduction on any account charged to the policyholder 
on each respective risk from the date of the policy, and in addi- 
tion the sum of two hundred thousand dollars; (h) a true copy of 
the articles of association, partnership agreement, or inter-insur- 
ance contract of such Lloyds or inter-insurcvnce association, verified 
by its attorneys or attorneys-in-fact ; (c) an agreement executed 
hy an attorney or attorneys-in-fact for such Lloyds or inter-insur- 
ance association in such form as the superintendent of insurance 
'inmj prescribe that it will not do any business in this state which 
a domestic Lloyds or inter-insurance association cannot do; (d) a 
declaration and agreement duly executed and acknowledged by each 
of the underwriters of such Lloyds or inter-insurance association, 
appointing the superintendent of insurance the true and lawful 
attorney for such Lloyds or '%nter^insurance association and trie un- 
derwriters thereof in and for this state upon whom all legal pro- 
cess in any action or proceeding against the said Lloyds or inter- 
insurance association or the underwriters thereof may be served 
and that any service upon him shall be equivalent to the personal 
service within this state of such process on each and every of 
such underwriters or inter-insurers. If any such Lloyds or inter- 
insurance association is authorized to do business in this state, and, 
after such authorization, other underwriters or inter-insurers de- 
sire to join in issuing policies of insurance in this state with the 
underwriters or inter-insurers who have filed such declaration and 
agreement, they are authorized to so join upon filing similar de- 
clarations and agreements with the superintendent of insurance. 
The certificate of authority of any such Lloyds or inter-insur- 
ance association shall be revoked by the superintendent of insur- 
ance if at any time it appears that any underwriters or inter-in- 
surers are issuing policies of insurance luithin this state, under 
apparent authority of such certificate luithotd filing such declara- 
tion and agreement as aforesaid, or if such Lloyds or inter-insur- 
ance association does not maintain at all times the funds specified 
in this section, or has violated its agreement, or the law, or is 



158 [Assembly 

found to he in such a condition that the further transaction of bus- 
iness by it luill he hazardous to its policyholders or its creditors or 
to the public. 

Each such Lloyds or inter-insurance association shall pay the 
superintendent of insurance the fees required by section six of this 
chapter^ and, in lieu of all other taxes upon premiums, shall an- 
nually on or before the first day of February in each year, pay to 
the superintendent of insurance a tax of two per centum on all net 
premiums collected or received by it for insurance upon property 
situate within this state during the preceding year ending the 
thirty-first day of December, ivhich shall be paid by him into the 
state treasury. 

§ 5. This act shall taJce effect July first, nineteen hundred and 
eleven. 

An Act to amend the insurance law in relation to establishing tlie 
office of state fire marshal, defining his powers and duties^ and 
providing for his compensation and the maintenance of his 
office. 

The People of the State of New YorJc, represented in Senate 
and Assembly, do enact as follows: 

Section 1. Chapter thirtj-three of the laws of nineteen hun- 
dred and nine, entitled ^^An act in relation to insurance corpora- 
tions, constituting chapter twenty-eight of the consolidated laws/' 
is hereby amended by inserting therein a new article to be article 
ten-a thereof, and to read as follows : 

ARTICLE X-A. 

STATE FIRE MARSHAL. 

Section 350. Office of state fire marshal established; appointment; 
term; salary. 

351. Deputies. 

352. Assistant officers. 

353. Duties of the assistants to the state fire marshal to 

investigate the cause and origin of all fires. 

354. Duties of the state fire marshal and assistants to in- 

spect property. 



ISTo. 30.] 159 

Section 355. Powers of state fire miarshal, deputies and assist- 

ants. 
J 356. Records. 

357. Annual report. 

358. Witnesses. 

359. Duties of district attorneiy. 

360. 'Oompensation of assistants. 

361. Penalties. 

§ 350. Office of state fire marshal estaMislied ; appointment; 
term; salary. The office of state fire marshal is hereby estab- 
lished. The gO'vernor is hereby authorized and empowered to 
appoint, within thirty days after this act shall take effect, by and 
with the advice and consent of the senate, a suitable person who 
shall be a citizen of this state, as state fire marshal, who shall 
hold the office until his successor is appointed and qualified. Stich 
officer shall keep his office in the capitol in the city of Albany 
and may be removed for cause at any time by the governor. He 
shall receive an annual salary of four thousand dollars and shall 
be paid, in addition, his actual and necessary eixpenses incurred 
in the performance of the duties of his office. He shall devote his 
whole time to the duties of his office. Whenever there shall be 
a vacancy in the office of state fire marshal, the governor shall 
fill the vacancy for the unexpired term in the manner provided 
in this section. The state fire marshal and his deputies shall take 
and subscribe and file in the office of the secretary of state^ the 
constitutional oath within fifteen days from time of noticie of 
their appointment respectively. 

§ 3'51. Deputies. The state fire marshal shall appoint a first 
deputy fire marshal, who shall receive an annual salary of twenty- 
five hundred dollars, and a second deputy fire marshal who shall 
receive an annual salary of two thousand dollars. Each deputy 
shall also be paid his actual and necessary expenses incurred in 
the performance of the duties of his offiice. The state fire marshal 
shall also appoint such other clerks and assistants as s.hall be 
needed in the performance of the duties of his office. In case of • 
the absence of the state fire marshal, or his inability fi-^om any 
cause to discharge the duties of his office, such duties «hall de- 
volve upon the first deputy state fire marshal; and in case of the 



160 [Assembly 

a,bseince lof the state fire marslial and the first deputy state fire 
marslial, or tlieir inability froin any cause tO' discliarge the duties 
and powers of tlieir ofiice, such duties and powers shall devolv^ 
upon the second deputy state fire marshal. ▼ 

§ 35'2. Assistant officers. All municipal fire marshals in those 
municipalities having such officers, and, where no such officer ex- 
ists, the chief of the fire department of every incorporated city or 
village in which a fire department is established, the president 
or like senior officer of each incorporated village in which no fire 
department exists, and the clerk ofi each organized town without 
the limits of any incorporated village or city, shall be, by virtue 
of such office so held by them, assistants to the state fire marshal 
and subject to the duties and obligations imposed by this article 
and shall be subject to the direction of the state fire marshal in 
the execution of the provisions hereof. Immediately upon taking 
office the state fire marshal shall prepare instructions to the assist- 
ants designated herein and form for their use in the reports re- 
quired by this article and cause them to be printed and sent, to- 
gether with a copy of this article to each such officer located in 
this state. 

§ 353. Duties of the assistiants to the state fire marshal to in- 
vestigate the cause and origin of all fires. The assistants to the 
state fire marshal as defined in the preceding section shall inves- 
tigate the cause, origin and circumstances of every fire occurring 
in any city, village or town in this state by which property has 
been destroyed or damaged, and so far as it is possible, determine 
whether the fire was the result of carelessness or design. Such 
investigation shall be begun immediately upon the occurrence of 
such fire by the assistant in whose territory such fire has occurred, 
and if it appears to the officer making such investigation that 
siLCii lire IS of suspicious origin, the state fire marshal shall be 
irrv ;./!*, i'-cl 7 notified of such fact. Every fire occurring in this 
s DC reported in writing to the state fire marshal within 

thirtv I! after the occurrence of the same by the officer desis- 
n;i(e'* - tion three hundred and fifty- two of this article in whose j^ 
ji' '■ such fire hag occurred; such report shall be in the 

fo!' :■ 1 'esc ibed by the state fire marshal and shall contain a state- 
nr 1 t ai ; facts relating to the cause and origin of such fire that 



Xo. 30.] 161 

can be ascertained, the extent of damage thereof and the insurance 
upon such property, and such other information as may be re- 
quired. 

§ 354. Duties of the state fire marshal and assistants to inspect 
property. The state fire marshal, his deputies or assistants, upon 
the complaint of any person or whenever he or they shall deem it 
necessary shall inspect all buildings and premises within their jur- 
isdiction. Whenever any of said ofiicers shall find any building 
or other structure which, for want of repairs or by reason of age 
or dilapidated condition or for any other cause, is especially liable 
to fire and which is so situated as to endanger other property, and 
whenever such officer shall find in any building combustible or 
explosive matter or inflammable conditions dangerous to the safety 
of such buildings he or they shall order the same to be removed or 
remedied, and such order shall forthwith be complied with by the 
owner or occupant of such premises or buildings. If such order 
is made by any deputy or assistant to the state fire marshal such 
owner or occupant may, within twenty-fours, appeal to the state 
fire marshal, who shall, within ten days, review such order and 
file his decision thereon, and unless by his authority the order is 
revoked or modified it shall remain in full force and be obeyed by 
such owner or occupant. 

Any owner or occupant failing to comply with such order within 
ten days after said appeal shall have been determined, or, if no 
appeal is taken, then within ten* days after the service of the said 
order, shall be liable to a penalty of fifty dollars for each day's 
neglect thereafter. The service of any such order shall be made 
upon the occupant of the premises to whom it is directed by either 
delivering a true copy of same to such occupant personally or by 
delivering the same to and leaving it with any person in charge of 
the premises, or in case no such person is found upon the prem- 
ises by affixing a copy thereof in a conspicuous place oii the door 
to the entrance of said premises ; whenever it may be necessary to 
serve such an order upon the owner of premises, such order may be 
served either by delivering to and leaving with the said person a 
true copy of said order, or, if such owner is absent from the juris- 
diction of the officer making the order, by mailing such copy to 
the owner's last known post office address. 



162 [Assembly 

The penalty herein provided may be recovered in an action 
brought in any court of the county v^here such property is located, 
in the name of the people of the state, under the direction of the^- 
state fire marshal or any of his assistants herein designated, by the 
legally constituted law officer of the city, village or town where 
such property is located or by an attorney specially designated 
therefor by the attorney general. 

§ 356. Powers of state fire marshal, deputies and assistants. 
The state fire marshal or his deputies may, in addition to the in- 
vestigation made by any of his assistants, at any time investigate as 
to the origin or circumstances of any fire occurring in this state. 
The state fire marshal, his deputies and assistants • shall have the 
power to summion witnesses and compel them to attend before them, 
or either of them, and to testify in relation to any matter which is 
by the provisions of this article a subject of inquiry and investiga- 
tion, and may require the production of any book, paper or document 
deemed pertinent or necessary to the inquiry, and shall have the 
power to administer oaths and affirmations to any person appearing 
as a witness before them ; such examination may be public or pri- 
vate as the officers conducting the investigation may determine. 

jSTo person shall be excused from attending before the said fire 
marshal er any of his deputies or assistants when summoned _ so 
to attend, nor, when ordered so to do, shall they be excused from 
testifying or producing any books, papers or documents before 
such officer upon any investigation, proceeding or inquiry insti- 
tuted under the provisions of this article, upon the ground or 
for the reason that the testimony or the evidence, documentary or 
otherwise, required of him may tend to convict him of a crime or 
subject him to a penalty or forfeiture, but no person shall be prose- 
cuted or subjected to a penalty or forfeiture for or on account of 
any transaction, matter or thing concerning which he may have 
been required so to testify or produce evidence, documentary or 
otherwise, and no testimony so given or produced shall be received 
against him upon any criminal investigation or proceeding ; if, m 
after any such examination of witness or any investigation, the ^- 
state fire marshal or any of his deputies or assistants is of the 
opinion that the facts in relation to such fire indicate that a crime 
has been committed, he shall present the testimony taken on such 



No. 30.] 163 

examination, together with any other data in his possession to the 
district attorney of the; proper county, with the request that he in- 
stitute such criminal proceedings as such testimony or data may 
warrant. 

The state fire marshal or his deputies or any of his assistants may 
at all reasonable hours enter any building or premises within his 
jurisdiction for the purpose of making an inspection which, under 
the provisions of this article, he or they may deem necessary to 
be made. 

§ 356. Records. The state fire marshal shall keep in his ofiice a 
record of all fires occurring in this state and of all the facts con- 
cerning the same, including statistics as to the extent of such fires 
and the damage caused thereby, and whether such losses were 
covered by insurance, and, if so, in what amount. Such record 
shall be made daily from the reports made to him by his assistants 
under the provisions of this article. All such records shall be 
public, except any testimony taken in an investigation under the 
provisions of this article which the state fire marshal in his dis- 
cretion may withhold from the public. 

§ 357. Annual report. The state fire marshal shall annually, 
on or before the fifteenth day of February, transmit to the legis- 
lature a full report of his proceedings under this article and such 
statistics as he may wish to include therein; he shall also recom- 
mend any amendments to the law which in his judgment shall be 
desirable. 

§ 358. Witnesses. Any witness who refuses to obey a sum- 
mons of the state fire marshal, his deputies or assistants, or w^ho 
refuses to be sworn or to testify, or who disobeys any lawful order 
of the state fire marshal, his deputies or assistants in relation to 
any investigation instituted by him or them, or who fails or re- 
fuses to produce any book, paper or document touching any matter 
under investigation or examination, or who is guilty of any con- 
temptuous act after being snmmoned to appear before him, or 
either of them, to give testimony in relation to any matter or sub- 
ject under examination or investigation as aforesaid, may be pun- 
ished for contempt of court. 

§ 359. Duties of district attorney. The district attorney of 
any county upon request of the state fire marshal, his deputies or 



164 [Assembly JSTo. 30 

assisrauts, shall assist such officers upon an investigation of any 
fire whichj in their opinion, is of suspicious origin. 

§ 360. Compensation of assistants. Except in cities having 
over seventy-five thousand inhabitants, all assistants of the state 
fire marshal not receiving a salary from the state of 'New York 
shall receive, upon the audit of the state fire marshal, fifty cents 
for each report of each separate fire reported to the state fire 
marshal under the provisions of this article, and in addition there 
shall be paid to the chiefs of the fire departments, or to the presi- 
dent or like senior officer of each incorporated village in which no 
paid fire department exists, or to the town clerk of each organized 
town without the limits of an incorporated village or city, whose 
duty it shall have been to make and who actually shall have made 
the investigation, the sum of fifteen cents for each mile traveled to 
the place of fire, and in the discretion of the state fire marshal, 
where an investigation has been had a sum not to exceed two dollars 
for each day's service spent in such in^'cstigation. In cities having 
upwards of seventy-five thousand inhabitants the sum of twenty- 
five cents for each report made and filed shall be paid in like 
manner to the officer making and filing the same. 

§ 361. Penalties. All penalties or forfeitures collected uud-cr 
the ]:»rovisions of this article shall be paid into the treasury of the 
state of ^ew York. 

§ 2. This act shall tal^e effect immediately. 



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LB N 71 



